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Five Ways to Prepare for Any Market Environment

By Dan Ferris, editor, Extreme Value
Friday, January 13, 2017

When the year is new, forecasts come out of the woodwork...
Wall Street analysts had a great year as a group in 2016, predicting on average the S&P 500 would finish the year around 2,200, according to Steven Russolillo of the Wall Street Journal. It closed at a little above 2,238 on Friday, December 30, the last trading day of 2016.
But something a little different is happening this year, relative to the last decade or so. Analyst predictions are showing signs of fear...
Wall Street is predicting, on average, the S&P 500 will end 2017 at 2,356. That's a rise of roughly 5% – the smallest rise predicted since 2005.
And Jason Goepfert of reports a 9% gap today between the highest and lowest predictions... the smallest gap since 1999.
In other words, Wall Street analysts are sticking close together, like a herd of impalas in the presence of a hungry cheetah...
That's why today, I'll discuss how to manage your portfolio in the face of uncertainty. Instead of relying on predictions, you can be ready for anything in the markets this year...
Right now, the Wall Street predictors are still trying to figure out what happened on Election Day. By the time they do, the "Trump effect" in the stock market will be over.
Rather than waste time predicting specific outcomes and betting on them (thus increasing your risk), you should prepare your portfolio for a wide range of potential outcomes and fill it with assets that can withstand various shocks.
This isn't easy, but we consistently recommend some basic strategies for doing it...
1.  Don't overpay for equities.  

We've said many times that even a great business can be a terrible investment if you pay too much. This will prepare you for the outcome of expensive stocks underperforming over the long term.
2.   Never be afraid to buy a great business trading at a bargain price.

It doesn't matter if the stock market is cheap, expensive, or somewhere in between. A bargain is always out there somewhere. Sure, they get harder to find when many stocks are expensive (like today). But they still exist.
Doing this will prepare you for the outcome we expect to take place over the long term: Things will get better for most people, and businesses that help bring that about will prosper.
3.   Don't be afraid to hold cash until you find a bargain.

There's nothing like the peace of mind you get from having plenty of extra cash on hand. There's nothing like the returns you'll get from deploying that cash when you finally find a good business trading at a cheap price... and then hold it for the long term, watching your money compound at arm's length from the taxman.
This will prepare you for the outcome that happens every now and then, one that most people are never prepared for: a big drop in equity prices. It's rare, but when it happens to you and you have plenty of cash to buy great stocks at cheap prices, you'll feel a lot better than if you have no cash to spend.
4.   If you can handle some inevitable losses, don't be afraid to short stocks whenever it makes sense for you to do so.

You'll lose often doing this. Betting against a business is risky. But selling short can make you money when almost nothing else does. And those are the moments you'll want to have extra cash on hand to take advantage of the many bargains that pop up when stock prices fall.
If you can't stomach taking small losses, you should avoid selling short and be satisfied with holding plenty of cash. Like holding cash, shorting stocks also prepares you for drops in equity prices – but it's only for more advanced investors.
5.   If you have a long-term, value-oriented perspective, avoid using debt to buy stocks.

If you rely on debt, when the equity value in your account falls, your broker will call you up and demand you either deposit more cash or sell some stocks (the dreaded "margin call"). It will feel awful to be forced to do this right when you should be scouting out new bargains.
It's hard to sleep when you have big debts looming over your head. Staying away from leverage will prepare you for many nights of satisfying, regenerative sleep, as your equity portfolio performs solely on the basis of your stock investments, not on the amount of debt you hold.
These five tips are a good place to start. If you put yourself in the "prepare, don't predict" mindset, I bet you'll come up with some ways to prepare for a wide range of possible outcomes we haven't covered.
Time spent forecasting the stock market's 2017 performance is time that could have been spent screening stocks for new bargains, enjoying a cup of tea, or watching an episode of Westworld. Use your time wisely this year, and don't predict... prepare.
Good investing,
Dan Ferris

Further Reading:

"Many folks refuse to stop obsessing about economic and political problems," Dan writes. But if you let these things stop you from investing, you'll miss out on compounding your wealth. Learn how to ride out macro problems and focus on what's really important in this classic essay: One Popular Investor Obsession You Should Give Up Right Now.
"To make plenty of money in stocks, you must behave better than the vast herd of investors," Dan writes. It's hard to beat the market. But a single change in behavior could multiply your profits tenfold. Read the full story here: The Only Advantage You'll Ever Get in the Financial Markets.

Market Notes


Today's chart highlights the effects of a weak holiday shopping season...
Last week, a slew of retailers reported holiday sales figures that were well below previous forecasts. Both Macy's (M) and Kohl's (KSS) same-store sales fell 2.1% in November and December compared with the same period in 2015.
The weak sales figures are also damaging retail suppliers... like VF Corporation (VFC), a $21 billion apparel-industry giant. This company combines the earnings power of JanSport backpacks, Lee jeans, The North Face outdoor apparel, Timberland boots and clothing, Vans sneakers, and more. But investors are concerned that weak retail sales will mean smaller orders for the company.
Shares dropped 20% from their August peak and are now trading at a new 52-week low. VF Corp is a great business with strong and durable brands. If shares rebound, it's a stock you should have on your watch list...

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