A Guaranteed Way to Lose Money (And How to Avoid It)

Rule No. 1: Don't lose money... Stocks and bonds won't return what they used to... A guaranteed way to lose money (and how to avoid it)... Last chance for a free lifetime of Retirement Millionaire... Hear Doc's retirement 'wake-up call' now...

We talk a lot in the Digest about how to make money...

But if you ask any experienced investor about the key to a long, successful career, they'll likely tell you something similar to what Warren Buffett calls "Rule No. 1"...

Don't lose money. (If you're curious about Rule No. 2, it's "Don't forget Rule No. 1.")

It's not as easy as you might think to follow Rule No. 1, of course... When I (Corey McLaughlin) look back on my early investments in particular, I can quickly remember a few examples. And I'm sure you can recall similar missteps along the way...

Maybe you put a chunk of your portfolio into a stock that you liked... then watched its share price go steadily down for reasons you didn't understand. So then, you sold at what later appeared to be exactly the wrong time as you watched the price bounce back up.

And even worse, maybe you stayed "out of the game" for a while after that... until you got the "feel" to buy something again... and then the whole process repeated. Or maybe you compounded your problems even more by taking on more risk to try to make up for your previous losses.

The point is... Everyone should learn the basic lessons of "not losing money" eventually. Call it the price of admission to the markets. And it's worth it if you learn from your mistakes.

But there are other, less obvious ways to lose money – and these aren't worth it...

Fortunately, if you've been with us for any length of time this year, you're likely already familiar with the surefire way to lose money that I'm going to talk about today (and how to avoid it). It has to do with inflation...

We've talked about inflation as a "hidden tax" on us – "We the People" – over time. But frankly, the concept can be hard to understand...

It might take folks years, if ever, to realize how inflation is costing them money. And it goes way beyond simply paying higher prices at the gas station or the local grocery store.

I'm talking about how inflation eats away at an investment portfolio over time.

Today, I want to share a specific example, to put it way out in the open – because this is a big idea that everyone should understand or be reminded of... It comes from our colleague Dr. David "Doc" Eifrig and his senior analyst Matt Weinschenk, who discussed it during their recent retirement "wake-up call," which debuted last week.

In part, Doc and Matt talked about a guaranteed way to lose money these days. That got our attention given what we've learned about investing over the years. It stems from a big piece of conventional wisdom that most money managers still use today...

We talked last week about the faulty logic behind using the '60/40' portfolio all the time...

In a series of essays, Doc and his research team noted that in an inflationary period like today, simply splitting your portfolio between 60% stocks and 40% bonds – the conventional wisdom – isn't the right move.

Not only are you potentially leaving gains on the table, you're also taking on risk that most investors don't even realize exists. Doc said essentially you need to be more picky... and that he has come up with a portfolio plan to use instead in the decade ahead.

I wrote about this concept on Monday, but I fear that the message wasn't strong enough. So I want to be clear about it today, using Doc's own words...

In short, stocks might not return what you expect in the decade ahead...

Many folks are overlooking the sky-high valuations of stocks today. After all, stocks have only gotten more expensive coming out of the COVID-19 pandemic, going beyond what many people thought possible.

But in these high readings today, Doc sees an important point...

He sees plenty of evidence that the conventional idea of buying a basket of, say, all the stocks in the benchmark S&P 500 Index likely won't return the roughly 6% to 10% or so that most people have come to expect over the past decade.

Jeff Havenstein, an analyst on Doc's team, explained the reasons why in last Monday's Digest. We wrote about this idea in the March 2 Digest as well. In that essay, we noted that it comes down to taking inflation into account when measuring the value of stock prices...

The Shiller P/E ratio, named after the Yale economics professor who invented it, is based on the average inflation-adjusted earnings from the previous 10 years. It's also known as the cyclically-adjusted P/E ("CAPE") ratio.

And in the following chart, you can see that today's reading is only topped or matched by the numbers seen ahead of the dot-com bubble and the Great Depression...

We probably don't need to tell you what followed the first two highlighted dates here – the Great Depression in the late 1920s and early 1930s, and the dot-com bust in the early 2000s.

And unfortunately, the CAPE ratio has only ticked higher since March – to 37 today.

No gauge or collection of data is perfect, of course, but...

You're doing yourself a disservice if you don't at least pay attention to this indicator...

The S&P 500 has returned an average of barely 1% – over a 10-year period – when the CAPE ratio was at least in its 90th percentile in its history.

And it has now been at that level for months.

In comparison, the S&P 500 has gained an average of roughly 11% annually in "cheaper" times. So, as Doc said in his wake-up call, don't expect the same old returns from stocks in the decade ahead...

That's just not what the data tells us. Instead, this period of extraordinary growth is simply coming to an end, just as it has time and time again throughout history.

We know what comes next in this historical cycle, and signs are telling us to prepare for a decade of zero to perhaps negative returns in things like index funds for the market.

Think about that... We're talking about a potential negative return in an asset class that might make up at least 60% of many Americans' portfolios.

The risk-reward setup is not very good.

Then, Doc talked about what makes up the other 40% of the conventional portfolio...

We're talking about boring old bonds, which once paid investors a meaningful return for giving money to someone else to use.

But nowadays, it's also wise to think about bonds differently. As Doc said...

U.S. bonds used to be called risk-free returns. These days, we're calling them return-free risk. With bond yields so low, plus taxes, plus looming inflation, you could be putting about half of your portfolio into an asset almost guaranteed to lose money.

Let me say that again, and please pay attention to this: with 20% to 40% of your portfolio in bonds, I can guarantee you will lose money over time. Yet this is still the narrow strategy most financial planners would recommend to you.

It doesn't take much to see the problem here, though... A 10-year U.S. Treasury note pays a 1.5% yield today, while a 30-year U.S. Treasury bond will pay 2.1%.

If the Federal Reserve's "official" inflation numbers are running higher than that (around 4% year over year, as of May)... and many prices elsewhere are rising by greater rates... on balance, you're losing money by owning "safe" bonds.

If 40% of a portfolio is dedicated to a low-return asset class that won't keep up with inflation, it's the opposite of safe. They're going to drain your retirement account and purchasing power... before the government does anything about it, if at all.

As Doc said during his wake-up call, it could take decades to earn all your principal back on a bond purchase. And it's the same story with stocks...

The S&P 500 trading at a CAPE ratio of 38 times earnings implies it would take 38 years to earn back your purchase price in earnings. As Doc said...

I would ask anyone watching to call up their adviser or money manager and ask that question...

The best-case scenario is that they take you seriously and investigate the ideas for what I'm sharing with you right now. The worst-case [scenario] is they brush you off and keep telling you the same old lie about splitting your money between stocks and bonds, because the market will magically take care of the rest.

And it's actually worse than it sounds. Not only are you losing money, you're also not making money in something else instead... something else that could beat inflation with less risk.

Doc has come up with a better, more fluid, ideal portfolio mix for today's times...

Listen, we can't tell you exactly how stocks and bonds will perform over the next decade. No one can see the future, after all. We can only tell you what we think will happen...

For that reason, Doc is not saying to sell all your stocks or all your bonds. He's just saying that if you're expecting the same old returns from these two massive asset classes over the next decade, you might want to think again...

Inflation is here... and in his opinion, it's sticking around for a while. You need to consider things like gold, real estate, or other hard assets more seriously than you have in the past.

In times of inflation, when the value of each U.S. dollar is dropping, the relative value of tangible, in-demand assets rise. And the value of certain stocks (those with "pricing power" – meaning the companies can raise prices and still sell as many goods as they're used to) or hard assets with tailwinds (like real estate or lumber, for example) will grow more than others.

It's always smart to think of investing as making your money work for you... And today, you need to make your money work even better for you.

Doc and Matt ran the numbers on the plan they've come up with, and they're truly amazing...

If you would've put $100,000 into a 60/40 portfolio in 1973, it would've grown to more than $7.5 million today. That's pretty good, but you also would've experienced drawdowns as high as 35%.

With this new approach, $100,000 in 1973 would've turned into $18 million... And get this, you never would've experienced a drawdown of more than 12%. It's more reward and lower risk at the same time.

That's the way not to lose money...

Better yet, you could get these returns by making just a few tweaks to your account four times per year. When you're looking at the really big picture and trading on a longer-term horizon, you don't need to trade as often if you believe in your strategy...

Doc and Matt explained everything you need to know, as well as how to claim instant access to their brand-new research, during their retirement wake-up call.

Right now, Doc is offering a significantly lower barrier of entry to his research...

If you sign up to get what Doc is calling his "Intelligent Retirement" model, you will get two years of his Income Intelligence advisory for the price of one. And not only that... if you act today, you'll get lifetime access to his fantastic Retirement Millionaire newsletter as well.

Today is the last day you can claim this bonus... That part of the offer will expire tonight at midnight. And frankly, this bonus might be worth the price of admission on its own... which is a fraction of what you would pay a hedge-fund manager or financial adviser to handle your money.

We read Doc's Retirement Millionaire newsletter regularly, not just for the financial advice... but also the health tips that you won't get anywhere else. Remember, Doc is a doctor... in addition to a former Goldman Sachs trader.

More to our point today, though, we just skimmed through Doc's inflation-related "New Era Playbook" that he released to Retirement Millionaire subscribers yesterday...

And we only skimmed it because if we read the whole thing, the Digest wouldn't be appearing in your inbox today... We wouldn't have the time to write after reading it.

Simply put, this one report might be worth the price of the offer Doc talks about in his wake-up call...

This playbook gives a step-by-step breakdown of inflation – what it is and how to understand its impact on the economy and your portfolio. Here's just part of the introduction...

It doesn't matter how the White House, the U.S. Treasury, or the Federal Reserve are creating new money and new credit. It doesn't matter what tricks they are using or how they spin it.

America is about to experience one of the greatest inflationary periods in our nation's history.

And make no mistake about it: Inflation will push millions of Americans down... out of the middle class, out of private retirement, out of private health care, and out of a decent life based on independence and privacy.

Most Americans, Doc says, are feeling pretty secure...

Home values are sky-high. So are stocks. Your brokerage account may have never looked better.

But here's the truth no politician will bother sharing...

Prices for all of these goods and services... prices for stocks and houses and art are NOT going up the way you think they are. Instead, it's the value of our money going down.

This is what ALWAYS happens at the start of a period of massive inflation and a collapsing currency.

But that's just the start...

Doc and his team also revealed 10 stocks you don't want to own in an inflationary environment like today... the two assets that you do want to own... and how to create the perfect "inflation era" portfolio.

These are ideas that a lot of individual investors miss – or never have the chance to hear...

But they are critical to understand.

Often, saving yourself from losses can be just as valuable as hitting on the big winners... especially in an inflationary environment when you can argue that what you do with every single dollar becomes much more important.

Existing Retirement Millionaire subscribers can check out these brand-new reports here. And if you don't already subscribe to this service and would like to join them, be sure to check out Doc's wake-up call and offer. It's well worth it...

As I said earlier, today is the last day you can claim free lifetime access to Retirement Millionaire when you take up this offer for Doc's Income Intelligence advisory and the brand-new research and Intelligent Retirement model he and Matt debuted last week.

Click here to get all the details.

New 52-week highs (as of 6/30/21): Analog Devices (ADI), Expeditors International of Washington (EXPD), KraneShares SSE STAR Market 50 Index Fund (KSTR), Intellia Therapeutics (NTLA), ProShares Ultra S&P 500 Fund (SSO), Smith & Wesson Brands (SWBI), and ProShares Ultra Semiconductors Fund (USD).

In today's mailbag, a question stemming from our Tuesday Digest on how "revenge spending" won't stop the retail apocalypse. Do you have a comment or question? Keep them coming at feedback@stansberryresearch.com.

"Corey, reading your analysis of traditional retailers vs. discount department stores raised a question in my mind: When all the full-price department stores are bankrupt, where will the discount operators source their merchandise?" – Paid-up subscriber Kurt H.

Corey McLaughlin comment: Great question, Kurt. In short, I believe the good discount stores will find a way to survive... or better ones will emerge, because there will always be opportunities for them.

For instance, discount chain TJX (owner of TJ Maxx, Marshalls, and HomeGoods) – which our colleague Bill McGilton mentioned as one with a very successful business model – is probably more entrepreneurial than most folks imagine a discount retail company to be...

A big part of TJX's business strategy is getting extra products from department stores. But the company also buys from many other sources, including online retailers. TJX actually explains "how we do it" for anyone to see in great detail on the websites of each of its brands...

We take advantage of a wide variety of opportunities, which can include department store cancellations, a manufacturer making up too much product, or a closeout deal when a vendor wants to clear merchandise at the end of a season...

The majority of products we sell are brand name merchandise generally offered at prices 20%-60% below full-price retailers' (including department, specialty, and major online retailers) regular prices on comparable product...

We [also] buy from all kinds of vendors: big brand names to boutique, designer labels, as well as up-and-coming labels and exciting gems from around the globe...

Our buyers are opportunistic and entrepreneurial. So when a designer overproduces or other stores overbuy, we swoop in, negotiate the lowest possible price, and pass the savings on...

Frankly, how TJX approaches business (and sells clothes, furniture, and those knick-knacks that fill drawers and shelves at home) can be applied with success to a lot of different industries today...

The chain profits from a variety of inefficiencies in the market, which are ever-present... And as it turns out, customers actually like going to these stores for this very reason – whether they know it or not.

Today, TJX sources products from so many different places that the company says store managers often don't even know what's coming until they see inside the delivery truck.

This is also why TJX's stores have no interior walls... Store managers can move products around all the time based on what arrives.

And that's actually the secret behind TJX's business model...

Anyone who has visited a TJ Maxx, Marshalls, or HomeGoods store (or knows someone who does) knows the feeling you get when you walk in... of a "one-time only" type buying opportunity with stuff you haven't seen before... because that's what it actually is.

If the employees don't know what will be in the store on any given day, customers definitely won't... That keeps them coming back and looking for deals.

It's a unique experience they can't get anywhere else.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 1, 2021