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Dear Daily Crux reader, After selling off for five straight weeks, stocks have reversed and are approaching all-time highs again. But many folks are still worried that we may be approaching the end of this rally. Even our colleague Porter Stansberry has warned a serious correction could be starting. But before you sell all your stocks and stuff the cash under your mattress, read on for an important reminder from Amber Lee Mason, co-editor of DailyWealth Trader. The information below could save you a lot of time, money, and unnecessary stress this summer. Good investing, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com |
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The Daily Crux: Amber, toward the end of last month's correction, you reminded DailyWealth Tradersubscribers the importance of taking the "long view" of the market. Can you explain what this means… and why it's so important for both traders and investors to remember? Amber Lee Mason: Whenever the market sells off like it did between late May through June, it's only natural for people to get a little worried. But it's also important to keep things in perspective. And a great way to do that is to step back from the bearish headlines and take the "long view." When we say the "long view," we just mean looking at the market from a longer-term viewpoint, rather than just the last few weeks or months of trading. It's a simple exercise, but it can be valuable even for very short-term traders. For example, pulling up a multiyear chart of the S&P 500 or Dow Jones Industrial Average shows that despite June's selloff – and despite the much bigger corrections of 2010, 2011, and 2012 – stocks have been locked in a long series of "higher highs and higher lows." Each leg of the rally has taken stocks to higher prices than the previous leg, and each correction has stopped short of the previous correction. This is the definition of an uptrend… and what we expect to see in a classic bull market. As we recently told our subscribers, it's reasonable – and even healthy – for a market to "retrace" 50% of a big gain before heading higher. If the market were to follow that script today and give back 50% of the gains since the November 2012 lows, we could easily see stocks decline another 5%-10% from current levels without worry. As the last few years have shown, big trends like this can last longer than most people believe is possible. Many were calling for the end of the bull market after the "flash crash" and big correction in the summer of 2010… again in the summer of 2011 during the government's debt ceiling crisis… and again last summer ahead of the end of the Federal Reserve's "QE2" program. In hindsight, each of those corrections was a great buying opportunity. Crux: That's a great point… But what if we're really approaching the end of the rally? What if Porter is right and a serious crisis is starting now? Mason: Well, it could be… We know Porter has an uncanny track record with big market calls like this. He could certainly be correct. Fortunately, as an independent trader or investor, you're not forced to take a strong stance or make a prediction today… You can let the market decide. As we like to say in DailyWealth Trader, the market is the judge, jury, and executioner of any trade. If we're wrong, the market will show us. This means we use predetermined stop prices on all our positions. If a stock we're following declines by a specific amount, we'll exit the trade for a small loss. If it doesn't, we'll continue collecting profits. We don't have a bias to the bullish or bearish side of the market. We'll go to whichever side is offering the most money for the least amount of risk… and when the facts change, we change our minds accordingly. Of course, not everyone is a trader, but this agnostic approach to the markets can be just as useful for investors. It's the key to fulfilling the classic investment advice to "let your winners run, and cut your losers short." ----------Advertisement--------- How to remove the emotion from investing… We all want to stay rational about our investments… but it's hard when your money is on the line… Should you let this one ride to the top… or get out while you're ahead? How can you lock in your gains AND protect your downside? This one tool takes the emotion out of investing and tells you the exact best time to exit a position. Learn more here. --------------------------------- Crux: We couldn't agree more… but this approach doesn't come naturally to most people. How can readers begin to apply this idea to improve their own trading and investing? Mason: That's right… It's human nature to get bearish when stocks fall, and bullish when they rise. But almost anyone can learn to take emotion out of their trading. The key is to have a plan in place before you get emotional and to develop the discipline to follow it no matter what. And it's really not that difficult to start. First, whenever you're making a significant change to your trading or investing approach, it's a good idea to conduct what my co-editor Brian Hunt calls a position audit. Take a look at all the positions you currently own and review the reasons you originally bought them. If any of those reasons are no longer valid, it's probably a good idea to exit that position. Assuming you're comfortable with all the positions you're holding, applying this approach to your portfolio is as simple as choosing an exit strategy for every position. The specific strategy you choose will depend on your individual circumstances and risk tolerance, but for each position, you must clearly define when and under what circumstances you'll exit. Longtime Stansberry & Associates subscribers are familiar with the 25% trailing stops many of our editors use. That's a strategy that seems to work well for most investors most of the time… Assuming a normal position size of no more than 4%, the 25% trailing stop will ensure you never lose more than about 1% of your total portfolio on any one position. Those in volatile sectors like small-cap stocks and commodities sometimes use 33% or even 50% stops – with smaller position sizes – to reduce the likelihood of exiting prematurely. And traders like us tend to use tighter stops – usually 8%-15% – to keep losses very small. Regardless of the stop you choose, the key to success is to have a clear and well-reasoned exit strategy for every position you buy. There's no room for doubt or second-guessing when your emotions are running high. Crux: Sounds good. Any parting thoughts? Mason: Like I mentioned earlier, we can't be sure whether the crisis Porter predicts is just around the corner… years down the road… or not there at all. Nobody can. Even Porter isn't selling all of his stocks. If the market continues higher like it has the past few years, this approach will help ensure you don't sell your winners too soon. But if a crisis does occur, it's important to remember that it will create huge opportunities for traders and investors alike… and this strategy will help ensure you keep your losers small and have the capital available to take advantage of them. Crux: Thanks for talking with us, Amber. Mason: You're welcome. Editor's note: DailyWealth Trader has quickly become one of our most profitable trading services. Since launching in May 2012, Amber and co-editor Brian Hunt have closed out an incredible 58 of 63 option-selling recommendations as winners. They've averaged annualized gains of more than 13% on those trades… You might be surprised to learn it's also one of our most affordable trading services. Click here to learn how you can take advantage of a no-risk trial today. |
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