It's Time to Double Down
Editor's note: The market is near an all-time high... and volatility is at historic lows.
In short, investors are as complacent as ever. And that's dangerous.
In today's Masters Series essay – originally published in the February 5, 2016 edition of our free DailyWealth e-letter – TradeStops founder Richard Smith explains why it's time to double down...
It's Time to Double Down
The markets are a mess. It's time to double down.
No, it's not time to double down on your losing positions. It's time to double down on your commitment to being a disciplined investor...
It's a serious time. And while I'm personally skeptical of the full-on bear market case, I am fully prepared to be proven wrong. And I've made sure that if I am wrong, I won't get hurt too badly.
Making sure that you don't get hurt too badly when you're wrong is the great secret to ultimately succeeding as an investor. You've got to be in a position to live with your losses. You can't allow the markets to dictate your emotions. You can take risks, but you need to understand the risks you're taking... and be comfortable with them.
In today's essay, I'll show you exactly how you can do that...
I once asked an early mentor of mine, a 40-year veteran of the markets, "What's the difference between the winners and the losers in the markets?"
I'll never forget his reply: "The winners don't need the money."
You can't risk more than you can afford to lose. It's advice that I took to heart. You should, too.
Yes, we all want to grow our wealth through investing in the capital markets, but that happens gradually, over time. It takes patience... And you can't get there without a solid risk-management plan.
Given current market conditions, it's especially important to know how to manage market risk.
At the heart of any great risk-management plan is trailing stops. Longtime Stansberry Research readers know that smart trailing stops are an effective investment tool for individual investors to manage risk because they limit losses and let your winners run.
I recommend using a simple 25% trailing stop. It's a time-tested strategy that – backed up by my extensive back-testing – has proven to be a successful risk-management system over and over again. It's widely used by experts like Steve Sjuggerud and Stansberry Research founder Porter Stansberry.
Let me show you how effective the 25% trailing stop is by using one of the hottest stocks of the past few years – Valeant Pharmaceuticals (VRX) – as an example.
Let's say we bought shares of Valeant back in August 2014 for around $120 per share. About a year later, shares were trading for a little more than $260 – a gain of about 120%. Our trailing stop hadn't been triggered... We were simply letting our winner run higher.
But as any investor can tell you, stocks don't move straight up forever. Eventually, Valeant hit a rough patch.
In October 2015, we stopped out of the trade for a 67% gain. We sold when the trailing stop told us to sell. And it's a good thing we did... Had we ignored our trailing stops, we would be sitting on a loss of nearly 90% today. Take a look...
As you can see, the trailing stop helped us lock in our profits before shares crashed. It took the emotions out of our investing. Sure, we didn't sell at the exact top... But we aren't sitting on a big loss today, either. And we can live to trade another day.
Now that you see how trailing stops work, are you ready to double down on your commitment to be a disciplined investor? Are you ready to take advantage of these market conditions?
Using trailing stops is the best way I know to protect your investments and grow your portfolio safely.
Good investing,
Richard Smith
Editor's note: Earlier this week, Richard joined Porter and Steve Sjuggerud for one of the most informative and entertaining live events we've ever held. They showed attendees the best way to maximize their gains and protect their portfolios as the current bull market winds down. Because we know some readers weren't able to join us live, we've posted a full video replay of the event. Click here to watch it now.