2018 Could Be a Year for the Record Books

Another day, another 'whipsaw'... 'Trade war' fears rise and fall again... 2018 could be a year for the record books... Three keys to surviving and thriving in volatile markets...

The stock market rollercoaster continues...

All three major U.S. indexes surged more than 1% on Monday morning... before reversing sharply and giving up nearly all those gains by the end of day.

This morning, stocks opened higher again, and all three indexes closed up more than 1% this afternoon.

As has been the case of late, these moves followed rising – and falling – fears of a 'trade war' with China...

Stocks fell on Monday following new remarks on trade from President Donald Trump. They soared again overnight following a speech from Chinese President Xi Jinping. As the Wall Street Journal reported this morning...

Chinese President Xi Jinping promised foreign companies greater access to China's financial and manufacturing sectors, pledging Beijing's commitment to further economic liberalization amid rising trade tensions with the U.S.

Throughout his 40-minute address, Mr. Xi never mentioned the trade friction with the U.S. or President Donald Trump. His remarks seemed designed to offer some policy initiatives, if not concessions, while drawing a contrast with President Trump's "America First" agenda and portraying China as a steady global partner committed to the international trade order...

In apparent, if unacknowledged, answer to some of the U.S.'s criticisms, President Xi said China would increase imports, improve the protection of intellectual property and provide a more transparent, rule-based environment for foreign investment. He also pointed to Beijing's announcement late last year that it would raise foreign-equity caps in the banking, securities and insurance industries, and promised those measures would be implemented.

While Xi's remarks were conciliatory, we suspect the celebration could be short-lived...

The reality is, the speech promised little that China hasn't already proposed, and it offered no clear schedule or timetables for implementation. Barring concrete progress on a trade deal, we suspect it's simply a matter of time before tensions rise again. As our colleague John Gillin explained to Stansberry NewsWire readers this morning...

The markets are focused on trade wars. That's it...

The news that China intends to try to do better is welcomed, but this rhetoric is nothing we haven't heard before. This is the third or fourth whipsaw (over 1% move) that markets have had in as many weeks, and Mr. Xi will not have the spotlight and adulation for long.

Trade talks and skirmishes are going to go on for months. And so will volatility.

Speaking of volatility, if the markets have felt unusually erratic of late, it's not just you...

According to Gluskin Sheff Chief Economist David Rosenberg, the S&P 500 Index is on pace for an incredible 100 sessions with a daily move of 1% or more. It's still early, and there's no guarantee this pace will continue. But it would place 2018 in rare company. In fact, this has only occurred in five previous years over the past 70.

Two of those years – 2001 and 2008 – occurred in the middle of a serious bear market decline. The other three – 1974, 2002, and 2009 – marked significant multiyear bottoms. But all five were incredibly volatile periods for investors.

We remain cautiously bullish today...

As always, we have no crystal ball. But we still see few of the serious warning signs that typically precede a major bear market or recession. For now, we expect the bull market will continue.

But whether the "Melt Up" resumes or a "Melt Down" arrives early, we continue to believe this year could be one for the record books.

Last week, DailyWealth Trader explained why volatile markets are so difficult for most folks...

You see, the problem isn't just the effect they have on your portfolio... It's also the effect they have on your mind.

We want to believe these big moves are meaningful. But they aren't. As editor Ben Morris explained in the April 4 issue of DailyWealth Trader...

When we see lots of green in the markets, our brains tell us more good times are ahead. When we see lots of red in the markets, our brains tell us there's more pain to come. But we know only one will prove to be true.

So when we see a big up day followed by a big down day, then another big up day followed by another big down day, we struggle...

Our brains want to fit the price action into a rational model... a sensible big-picture view of what's going on. But there isn't one.

Volatility is uncertainty. It doesn't allow us the luxury of following a rational, knowable script.

Fortunately, you don't need to know the 'script' to make money in the markets...

As Ben reminded readers, you simply need to stick to the three basics of sound investing and trading. These should sound familiar to every Digest reader...

Let's start with the most important of the three – asset allocation...

Asset allocation is the component of your wealth plan that deals with the amount of money you have in various assets. How much of your wealth is in cash? Stocks? Precious metals? Real estate? This all goes under the umbrella of asset allocation.

The No. 1 goal with asset allocation is to avoid taking too much risk in just one asset class... because when one asset class "zigs," others will "zag." In this way, effective asset allocation allows you to sidestep financial disaster...

I recommended you hold at least 5%-10% of your wealth in precious metals, at least 10%-20% in cash, and whatever you're comfortable with in real estate and other commodities.

You'll know you have the right asset allocation when big drops in stocks don't freak you out. Your losses in stocks will be partially offset by your gains in other assets. So you'll be a lot less likely to make bad, emotional trading decisions.

Second, of course, is using proper position sizing...

If you're not familiar, this is simply the percentage of your portfolio you allocate to any single position. It's one of the most important decisions you'll make as an investor, and it is even more critical during volatile markets like today. More from Ben...

A stock could make up 1% of your portfolio, for example... or 10%. Obviously, you stand to make a lot more money if a 10% position makes a big move in your favor... And you stand to lose a lot more if it goes against you.

Pullbacks like the one we're in right now are often fantastic opportunities to open new positions. But if you start with a big position, the volatility is more likely to get inside your head and cause you to sell at the wrong moment.

Instead, start with a small- to medium-sized position. Then add to that position as it moves in your favor.

The third component is setting a stop loss on every position you own...

Again, if you're not familiar, this is just a predetermined price point at which you'll sell a position if it moves against you. They're designed to further limit your risk in any single position and remove emotions from your investment decisions. And like position sizing, you can adjust your stops to suit your needs...

When you use a "tight" stop loss (close to the current share price), you risk losing less... But you increase your odds of stopping out and taking that loss. When you use a "wide" stop (further away from the current price), you risk losing more... But you decrease your odds of stopping out, because the position has more "wiggle room."

The type of stop loss you use should correspond to your confidence in the timing... If you think you're buying at the perfect time, you don't need to risk 20% on the downside. A 5%-8% stop loss may be enough. If you're less sure of the timing, but you know you want to hold the position for a long time, it makes sense to use a wider stop loss. Maybe 15%-25% is appropriate.

In today's market, volatility will likely knock you out of positions you open with tight stop losses. So lean toward using wider stops and smaller position sizes. Follow this advice and you'll sail through the current volatility with ease.

New 52-week highs (as of 4/9/18): Monsanto (MON).

In today's mailbag: One subscriber is itching for a "trade war"... another has question about TradeStops and mutual funds... and a third wants to know how to sell. Send your notes to feedback@stansberryresearch.com.

"In [a recent] Stansberry Digest you fall in the same argument many other very wealthy people do, that is, the China Trade war is going to [hurt] many everyday Americans; because the wealthy ones would care less, and the millions upon millions of Americans that go from pay check to pay check if they find a full time job in this country anymore does not matters either. If you do not have anything in the bank, or any portfolios, all you care is to see someone to finally put his foot down and say enough is enough. The elites should be very happy our President is doing this finally. God forbit the country had elected a far left Socialist. Then they would have seen who was going to be [hurt].

"I am not sure the elites realize (not yet) that there are many millions of desperate Americans who are really hearting because of the disgraceful commerce deals the so called leaders of the country made for the detriment of their own people just to fill their own coffers. So please do not tell us (everyday Americans) this trade wars will [hurt] us. Really?" – Paid-up subscriber John S.

Brill comment: Yes, really. We're curious, John... How exactly do you think higher consumer prices or a lower standard of living will help everyday Americans who are already struggling to make ends meet?

"I invest with Vanguard in their Admiral index funds with an expense ratio of 0.07%. Can these large index funds be measured for risk? (Vanguard 500 Index, Med. Cap Value Index, Med. Cap Index, Small Cap Index and Foreign investment Index funds.) If I split my investments between all 5 index funds equally and then annually re-allocate how is that any better or worse then the buying TradeStops for a large initial capital investment? Best regards." – Paid-up subscriber Chris K.

Brill comment: Yes, TradeStops can help you measure the risk among those funds. But you're right... In your case, it may not be worth the effort. You essentially own the entire market through those index funds, so adjusting your allocations based on expected volatility probably wouldn't make much difference in your total returns.

But the more important question is, why do you have your entire portfolio in equities? If you haven't diversified into other assets elsewhere, you're likely taking far more risk than you realize.

"Hello Porter, your services have been warning of a coming crash or deep cut in the stock market as the waning bull market comes to a close. These predictions have mentioned [this could begin within] six months to two years. In my stage of life, I would like to start to parry down my portfolio of stocks. I have few bond 'funds' (except for those that go up with rates) as I believe continued and frequent interest rate increases are in the near future. My other bonds have a termination date.

"My question is how should I sell my stocks? Should I sell the ones with good performance and may be getting a little expensive (and how do you determine that) or sell the losers or poor performers. As of now I have a high number of losers. Or is there a better method that's not insanely complicated or time consuming? I also want to add that my portfolio has benefited from some great recommendations from Dr. Eifrig and have sold many of those for nice profits. Thank you for any guidance." – Paid-up subscriber John Y.

Brill comment: As always, we're prohibited from giving individual investment advice. But there really is no "one size fits all" answer to your question.

In general, we recommend cutting losers and letting your winners run as long as possible. As our colleague Steve Sjuggerud has explained, bull markets can run far longer than you believe possible, and high valuation alone is not a reason to sell.

The easiest method – assuming you've followed our advice about position sizing and trailing-stop losses – is to simply follow your stops. That will keep you in your positions if the bull market continues, and will help you naturally raise cash if the bear market comes early.

Regards,

Justin Brill
Baltimore, Maryland
April 10, 2018