What the 'Eternal Optimists' Get Right

It's a blind spot in every investor's psyche. When you buy a stock, naturally you worry about what to do if it falls. But many people also worry about what to do if it rises.

Once an investment shows a little gain, fearful ideas permeate our thoughts. Any little bit of news – good or bad – seems like a reason to lock in gains.

This conundrum regularly worried investing legend Peter Lynch.

Lynch is an investing legend. He averaged 29% annual returns over the 13 years he ran Fidelity's Magellan Fund. His analysts joked that he "never met a stock he didn't like," and his fund swelled to more than 1,400 holdings.

Of course, no individual investor should try to manage 140 positions, let alone 1,400. But the point is... Lynch had a different outlook on the market than most folks: He was an eternal optimist when it came to buying stocks.

As he described his outlook on this blind spot of indecision, "We've been warned that a rise in oil prices is a terrible thing and a fall in oil prices is a terrible thing; that a strong dollar is a bad omen and a weak dollar is a bad omen; that a drop in the money supply is cause for alarm and an increase in the money supply is cause for alarm."

Lynch understood that there's no single rule that will tell you when to sell... And that's because there's no rule that tells you when to buy.

The strategy for selling is determined by the reason you bought in the first place – and should be determined at the time of your initial investment.

When you buy a stock, it's critical to know exactly what you expect to get out of the investment and what would lead you to sell...

Here are three steps I've told readers to take for years:

  • Write down WHY you bought it.
  • Write down WHEN you'll sell it.
  • Review your investment at least once a year (but preferably every six months).

One trick I use to make sure I stick with my discipline is to ask myself whether I'd buy more right now or recommend the investment to friends or family. If the answer is "no" to either question, it's probably time to sell.

If I'm really worried that I'm making a mistake, I remind myself that I can always open a new position after a 30- or 60-day break. There's nothing magical about the time frame. It just serves as a cooling-off period for my emotions. And most likely, a good investment will still be attractive at that point. And in many cases, I've found better opportunities by then.

There are plenty of valid "sell signals" you can use to cut short your losers. But trailing stops are also a simple, easy-to-understand way to eliminate your emotions and get out of losing positions before they get too large.

But it's not easy to take the emotion out of knowing when to sell. That's why I recommend you set time aside next Thursday, March 28.

You'll learn about a small group of our readers who actually knew – with 100% accuracy – that the crash was coming.

And many were able to sell their stocks and lock in profits weeks before the market bottomed.

So mark your calendars... On that night, we're going to show you a way of timing the markets that is so precise, it would have alerted you to sell your stocks weeks before the crash.

Reserve your spot right here.

Q: I have read that continued high doses of any of the fat-soluble vitamins can be dangerous. I think it is supposed to damage the liver or something. I'm not sure. What are your thoughts on this? – L.S.

A: I don't like fat-soluble, oil-filled vitamins. Fat-based chemicals can build up in human tissues. I avoid taking too many fat-soluble vitamins like A, D, E, and K, and you should, too.

Although they do have their benefits, at high concentrations, these vitamins create serious health problems. That means you could easily be overdosing on what's marketed as a perfectly safe supplement.

We've written a breakdown of the pros and cons of fat-soluble vitamins, which you can read right here.

Q: What information do you use that makes you choose the length of the options? – A.S.

A: In my Retirement Trader options service, we use an option's "time decay." Shorter-dated options lose value faster than longer-dated options.

Longtime subscribers know that the best time for decay in the value of options to occur is between eight weeks and six weeks before the expiration date. So we make the most money per day from week seven to week five. That's why I like to sell options with about two months left to go... We ride right across that sweet spot of time decay.

To learn more about how we use time decay to make money when we sell options, click here.

Q: I'm certain you probably do not travel via commercial airlines but if you had to make the decision to do so right now, would you? Or is it still just a giant flying petri dish of germs? – M.S.

A: I always fly commercial – how do you think I was able to retire early as a millionaire not once, but twice? I like to splurge on fine dining or my wine business, but for most things, I am still very frugal (you should see my ancient "bucket of bolts" car).

And although I railed against the flying petri dishes in early March, air travel is just as safe today as it's always been. And we have a little background on similar diseases. A 2003 study from the New England Journal of Medicine looked at flights where at least one passenger had SARS. They concluded that the risk of spreading viruses like SARS (which is the closest virus to the one that causes COVID-19) during air travel was no different than any other crowded area like a train or bus.

It could be a lower risk given the medical-grade HEPA filtration system used in commercial aircraft. This filter system clears the air every three to four minutes and gets rid of germs, bacteria, and viruses. Plus, travelers must wear masks now and the airlines have strict measures for cleaning in place. But I have little faith in the temperature checks the TSA wants to do... Especially as we know that infected folks are contagious for days before they even show symptoms (if they have symptoms at all).

So, for the last time, cover your nose and mouth when you sneeze or cough. Wash your hands and avoid touching your face at all when out in public, especially in tight quarters like an airplane. Another good tip: Change your clothes after traveling. Get rid of that feeling of airport "grime" as soon as you can.

Editor's note: Our offices are closed on Monday for Memorial Day, so your next issue of the Health & Wealth Bulletin will be in your e-mail inbox on Tuesday, May 26.

What are you doing for the holiday weekend? Let us know at [email protected].

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Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
May 22, 2020