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How to Start Out in Stocks – Here at Record HighsBy
Tuesday, December 31, 2013
I just received a fantastic letter from "Pastor Mark" – a new subscriber...
Pastor Mark's fear is the "right" fear to have right now...
He is worried about buying in at this point, after the U.S. stock market has run up so much and is sitting at record highs.
Boiling it down, he says, "I don't really want to buy into some of the positions that have already run up so much."
He asked me to share "some practical insight, guidance, or suggestions on the best way to enter the positions and what positions might want to be avoided if entering in at this stage of the game."
Pastor Mark says he's new to investing. Fortunately, he's been "doing a lot of research and reading," which is clear from his letter. And he says he's "ready to jump in, albeit with fear and trepidation."
Pastor Mark, you are not alone in your worries... I am certain thousands of other folks are thinking the same things you are right now.
Let me focus my answers on how to start out buying now, especially with stocks at new highs...
1) You can ALWAYS find reasons NOT to invest... the hard part is overcoming those reasons.
This is one of the most important concepts you can possibly learn...
In December of 2010 in DailyWealth, I wrote:
You can always come up with an excuse to NOT put your money to work. In that essay, I said, "Nobody will fault you for not investing. Meanwhile, you won't make any money." I highly recommend you go back and read that DailyWealth...
You will never be a massively successful investor unless you understand this concept and learn to overcome it.
Having said that... when stocks are at new highs:
2) You must play good defense, first and foremost.
Before putting new money to work, the first question you must answer is, how much money are you willing to lose? I am serious...
Most people are thinking about how much money they could potentially make, or how much they've missed out on. But you can't control either of those. But you do have some control over how much you are willing to lose...
For example, you could use "trailing stops" and/or stop losses. If you have $50,000 in savings, and you are not willing to lose more than $5,000 of that, then you must use 10% "stop losses" across the board. This is even more crucial after a huge run-up in stock prices. (You can read more about trailing stops and other stop losses right here.)
3) Don't worry about how much stocks have gone up... worry about what you are getting for your money.
There's no denying that U.S. stocks have gone up – a lot. But with bonds paying you next-to-nothing, and your savings account paying you even less, U.S. stocks are still a good value compared with all other financial investments. If you are worried about buying them here, read No. 1 on this list again.
4) Be willing to look beyond U.S. stocks.
I believe European stocks and emerging markets are better values than the U.S. stocks today.
You may wonder why I keep buying U.S. stocks when I think these other countries are better deals.
I think being fully diversified across all of these sectors is the way to go. We have made money sticking with the trend in U.S. stocks, and we haven't made as much in Europe and emerging markets, but we know the value is there. Our eggs are spread out over a few baskets.
One crucial fact here... Typically, when the U.S. sneezes, the rest of the world catches a cold. What that means is foreign stocks will likely fall if U.S. stocks fall. Don't think that because you're buying cheaper stocks outside the U.S. that you are safer.
In my opinion, foreign stocks have more upside potential from here, so I want to own them. But they are certainly not immune from downside risk.
So, to invest at new highs, at minimum, you must:
1) Learn to overcome your objections.
2) Play good defense.
3) Don't worry about how much something is up... worry about what you're getting for your money.
4) Be willing to look beyond U.S. stocks.
All of these are difficult to do... You can understand these concepts rationally. But emotionally, something happens inside that makes them difficult to implement.
In addition to these few thoughts for how to buy when stocks are at new highs, I highly recommend you go back and read my 10 rules for successful investors.
Pastor Mark, I can't give you all of the answers neatly in one little DailyWealth. Hopefully today's essay gives you some of the insights – and the confidence – to do what's right for you...
Good investing,
Steve
Further Reading:
"The market is up big over the last few years," Steve says. "But I strongly believe U.S. stocks could soar another 63% in the next two years." Get all the details here.
Yesterday, Brett Eversole explained why the current bull market isn't over yet. "Based on history, we should expect another two years of gains," he writes. And when the next bear market does begin, "history says it won't be a 2008-style bust in stocks." Here's why...
Market NotesTHE HARD TRADE IS THE RIGHT TRADE... IN EUROPE "Stepping out of your comfort zone could mean big returns..."
That quote comes from Brett Eversole in an August 2012 DailyWealth essay. He was discussing the idea of buying cheap, out-of-favor blue-chip European stocks... at a time when few others were even thinking about them. Shares were cheap and paying more than 5% in annual dividends.
The large companies Brett recommended operate around the globe. But investors sold shares because they're based in Europe... And Europe's problems were all over the news. Successful investors know that negative press often leads to great buying opportunities... But it also means "stepping out of your comfort zone."
Brett recommended buying the SPDR Euro STOXX 50 Fund (FEZ) to take advantage of the situation. As you can see in the chart below, it was a great time to buy. FEZ is up more than 40% since Brett's write-up... And shares are still cheap.
Buying into Europe was a hard trade to make... But it was the right trade.
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