"We're no longer in the phase of this historic bull market where everything is going up. It's a time when you have to be MUCH more selective."
That's what TradeStops founder Dr. Richard Smith said in an e-mail earlier this week.
Here at Health & Wealth Bulletin, we've been getting more cautious this year. And just last week, I told my Retirement Trader subscribers, "We want to pare back our risk and stick with 'boring' companies."
Longtime readers know the No. 1 way to protect your portfolio, especially with a bear market on the horizon...
You must have an exit strategy – it's vital to your success.
If you stick to your exit strategy, it can serve as a near-foolproof way to methodically cut your losses and let your winners ride.
One of the best exit strategies is to set stop losses. These are set prices or percentages you use to know exactly when to sell.
Now, you can use a notebook or Excel spreadsheet for keeping track of your exit strategies.
But ask yourself... how well has that strategy worked for you in the past?
If you've missed stops – and later regretted it – I recommend looking at what our friend Richard has built...
Richard developed a great program called TradeStops for keeping track of your exit strategies. There's no better way of tracking your stop losses than with his TradeStops software.
Next Thursday, May 10 at 8 p.m. Eastern time, we're hosting a special presentation with Richard, my colleague Dr. Steve Sjuggerud, and Stansberry Research founder Porter Stansberry. During this event, you'll discover a simple system for always knowing when to buy and sell stocks.
You'll also learn the one action you should take in 2018 to keep the money that you've gained in the stocks you already own... And to protect yourself from a sudden and gut-wrenching decline like we had in 2008.
Q: You talk a lot about proper position sizing... for example, not putting more than 5% of your money in one stock. Does that rule apply to funds? – T.W.
A: In my asset-allocation guide, I explain how to distribute your portfolio among different assets classes – stocks, fixed income, cash, and chaos hedges (like precious metals). Keeping your wealth stored in a diversified mix of investable assets is the key to avoiding catastrophic losses.
But don't forget the importance of position sizing for individual securities. Most of the time, I recommend subscribers put no more than 4%-5% of their portfolio in any one position. Some investments are safe to put more in, and others less. But in general, I prefer the 4%-5% rule.
In the case of funds, they're already diversified within the class they invest in – they give you instant diversification. And depending on your tolerance for risk from a sector, you could have anywhere from 5% to 20% of your investments in a closed-end fund.
Q: There are lots of stories on the news now of food poisoning cases, like the romaine lettuce story. You'd said to wash your produce with vinegar. Is that still the best way to keep food safe? – M.R.
A: The romaine lettuce issue you mentioned is an E. coli outbreak happening across the U.S. So far they've seen 121 reported cases of illness across 25 states. One in six Americans will suffer from food poisoning this year.
Food poisoning used to be an illness confined to bad food at a bad restaurant. But now, we're seeing more of outbreaks that show these dangerous bacteria have made their way into the foods in our kitchens.
That's why, in this today's Weekly Update video, my research assistant Amanda Cuocci gives you five ways to avoid food poisoning in an effort to lessen your chances of getting ill. You can watch it here.
Q: How would an individual investor ever capture the discount on closed-end funds? You would have to buy all the shares in a fund in order to liquidate it. Even if a big hedge fund did that, it would be really hard for them to sell everything for the alleged NAV. As soon as a large quantity was offered for sale, the prices would drop and that discount would disappear fast. – A.C.
A: That's a great question...
The "NAV" is the net asset value – the total value of a fund's securities (long- and short-term assets) minus the fund's liabilities and then divided by the number of shares outstanding. When I recommend buying a fund at a discount, I'm looking at where the fund is trading in the market – what you could pay per share.
I prefer to invest in funds that are trading at a discount to NAV because that gives us a dollar of assets for less than a dollar.
The fund's board can pass policies that allow the fund to purchase shares of itself in the open market... And like any good investment, what could be better than buying a liquid security (remember, the fund already holds its underlying securities) at 90 cents on the dollar? It's one of the few true "free lunches" in finance.
You can discover if a fund is trading at a discount to its NAV by going to the website CEFConnect.com. It's easy to use... Simply type the fund's ticker symbol into the search box. That will direct you to the fund's main page. You'll find the current NAV (and whether the stock is trading at a discount or premium to its NAV) near the top of the page, under the fund's name.
Are you prepping your portfolio? Let us know what you're doing at [email protected].
What We're Reading...
- Did you miss it? The best way to pick stocks.
- Something different: The gambler who cracked the horse-racing code.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
May 4, 2018