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Why You Should Learn How to Invest Outside of Stocks... ImmediatelyBy
Tuesday, March 2, 2010
A year ago I was getting calls from old friends saying that they were scared to be in stocks any longer.
These were people who just had bought and held for decades. In fact, a year ago was the right time to start buying stocks, not selling them. Nowadays, I see the opposite comments. People are proud to own stocks. Of course they are... since they've risen 60% in the past year. As one reader put it (in the February 24 review of my letter inwww.stockgumshoe.com/reviews, a site where readers rate the newsletters they read): "I am a traditional market investor, dividing my investments primarily between stocks and mutual funds." Now I'm no Sherlock Holmes, but a sentence like this tells me that this reader is middle-aged at the youngest. And it all makes perfect sense, really. Take a person who started investing in 1982. From then until 2007, he'd had a full quarter-century of gains. If the market fell, as it did in 1987 or from 2000-2002, it always snapped back. The fact that a 25-year bull market for stocks had never happened before in history that probably means little to him. After all, it happened to him. It was the experience of his entire life. But what if a 25-year bull market was an anomaly? A once in a lifetime event? For someone who, say, turned 30 around 1982 and is now nearly 60, this is a hard thing to contemplate. All your life things have been a certain way. You've come to accept them as normal. Any change is thus temporary. That is, until it isn't, and you are left holding on to past dreams. I've seen this happen several times over my life. As a kid in the late 1960s, I listened to investors who had ridden the great stock bull market from 1949 to 1966. The Dow soared from about 150 to 1,000 during those 17 years, a great rise of over 550%. They thought it would last forever, and when the Dow briefly touched new highs of over 1,000 in early 1973, they all thought they were back to the races. In fact, they were in for hard times. By mid-1982, the Dow was well below where it had been in 1966. Then came the people who had gotten rich in the precious metals markets during the 1970s. Silver soared from $1.29 to nearly $50: a rise of over 6,000%. Gold rose by 2,300% from 1971 to 1980. For many of them, all through the 1980s they waited while what they thought was a temporary correction turned into a 20-year bear market. Many held all during this period with only hopes and memories to sustain them. I believe we are seeing the same thing now with those who hold stock as a huge portion of their total investments. Getting back to the reader quoted above, his use of the term "mutual funds" already dates him from the time when these were every investor's dream. Younger investors well understand that with mutual funds, you are paying managers a fee that is too high for what they give back. Exchange traded funds, or ETFs, accomplish the same thing at a much lower cost. And to say that you are diversified between stocks and mutual funds is to say that you are not truly diversified at all. A recent letter to me from another reader shows he understands this. A new reader, he comes on with 2% in cash and 98% in stocks, and he knows he has too much in stocks. Probably most new readers are in this position. For them I would advise setting a trailing stop and selling if that stop is reached. This stop can be 25% from the recent post-March '09 highs. In my way of thinking, the stock market has given a rare reprieve to those who hold most of their money in it. This is a time to be moving out. You don't even have to abandon the stock market entirely (though I myself very nearly have). You can just lower the percent you hold in stocks to 33% or so. Cash and physical metals could make up the other two-thirds. You can have some precious metals stocks, but try to arrange things so that you own them with as little risk as possible, and have patience. A new leg down in the general market could take down all stocks, even the mining stocks. I know it can be hard for people to visualize what they grew up with completely being turned on its head. But investment history teaches us that this is exactly what happens, time and time again. Regards, Chris Weber Editor's note: Chris Weber is, by far, one of the best investors we know. He started investing at age 16... and was so good at it, he became a millionaire by the time he was 20. Today, he's one of the only people we know who makes his living investing, and he writes down exactly what he's doing with his money. To learn more about Chris' favorite recommendations for both cash and precious metals right now, click here. Market NotesONE OF THE GREATEST UPTRENDS IN HISTORY
Today's chart displays one of the best investment "systems" you'll ever find.
Before we reveal the system, remember: many things the average investor believes are investments are not investments at all. A home is not an investment. It is a consumer item. Gold is not an investment. It is money... a store of wealth. Stock in a gold-mining company is not an investment. It is a speculation. Now here's the system... Health care giant Johnson & Johnson has all kinds of attributes the rich investor demands from an investment. The company owns a suite of world-class brand names, like Listerine, Band-Aid, Neutrogena, Splenda, Rogaine, and Tylenol. It earns high profit margins. It sports a bulletproof balance sheet. And its dividend payout ranks second in consistency to the rising sun. The rich investor, after all, demands you pay him for the privilege of using his money. Below is the past 15 years of trading in J&J. It's one of the greatest uptrends in stock market history. This uptrend is only interrupted by major weakness in the broader market (2000, 2002, 2008). If you had bought after each of these market selloffs, you'd have made immediate short-term gains... and then participated in the long-term uptrend. Put another way, this system, just like our "trophy asset" strategy, says when a world-class investment goes on sale because of widespread public fear, buy as much as you can. |
In The Daily Crux
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