Most People Never Listen to This Simple Portfolio Advice (Don't Be One of Them)

How to figure out how much risk you are taking... A classic essay from our founder... Most people never listen to this simple portfolio advice... Don't be one of them... Daniela Cambone: Have we already seen 'peak inflation'?...

How much risk are you taking?

If you're like most people with money in stocks, your answer to this question likely is along the lines of "a lot," "probably too much," or, if you're confident, "not very much."

At the very least, your description is probably a subjective phrase or word that "feels right" to you... And as veteran investors frequently say, what feels right can often be the worst decision-making process you could possibly use...

To put a fine point on it, I (Corey McLaughlin) haven't met many individual investors who can quickly put a specific number or a grade on the amount of risk in their portfolio. But in today's Digest, I'll explain how to do just that...

Most people think they're 'sort of' ready for a market crash...

But the difference between reality and what you think is often large...

If you're managing your own portfolio, you might be taking twice as much risk as the benchmark S&P 500 Index... That is to say, if a bear market strikes and the S&P 500 falls 20%, your portfolio could do worse... and drop 40%.

Our founder Porter Stansberry shared a good example of how this happens in a classic essay republished in Steve Sjuggerud's DailyWealth newsletter on December 30...

I'm frequently astounded (and terrified) when I talk to individual investors and they start describing their strategies. A portly gentleman wearing overalls told me proudly at a Casey Research meeting once that he'd mortgaged his house to buy junior mining stocks. He wasn't worried about the pullback (which became a grinding, four-year bear market and probably wiped him out) because he was diversified across more than 30 different tiny companies.

On the other hand, your allocation could be more conservative than you want... meaning if the market returns about 27%, as it just did in 2021, you might only see returns that are half or three-quarters of that.

Alternatively, that might be fine with you. You might not care about beating the market at this stage of life... That's OK, too, and it depends on your goals and how comfortable you are risking a particular amount of money.

The point is, though, most people don't even know if their portfolio aligns with their goals...

Even rarer are they able to measure their risk. As promised, here's how to do it...

One great thing about the holiday season is that it's a time for our editors to share their all-time favorite "archived" content with subscribers...

This not only gives a lot of our staff some well-deserved time off around the holidays – but it also often brings timeless advice to light... stuff that might have been written years ago, but is still as valuable as ever.

The essay from Porter that I quoted from just now was one of them. I'm glad our DailyWealth team decided to re-share it.

In it, Porter describes two simple pieces of investment advice that most individual investors have never done... and it has nothing to do with which stock you should buy.

The first piece of advice is to truly understand how much risk you are taking...

As I shared at the end of yesterday's Digest, in his research, Steve uses a tool that anyone can use to create a personalized "exit plan" for every stock you own. And here's the thing... it can also reveal the risk you are taking with each stock, and it can help you do the work I'm about to explain.

But if you don't have this tool (from TradeStops) or aren't willing to use it, there's a "cocktail napkin" kind of way to do the same thing.

You can do a risk assessment of your portfolio by simply measuring the weighted average of the "beta" of your individual positions... Without getting too deep into the details, beta basically measures how much a stock moves relative to the market as a whole.

As Porter explained in his essay...

A beta of "1" means that a stock has the same volatility as the market as a whole. A beta of "0.5" means a stock is half as volatile as the market. And a beta of "2" means it's twice as volatile as the market.

You can generally find the beta on any security by using widely available databases, though we suggest you use our new Stansberry Investor platform... You'll find the five-year beta for any stock in our database in the "SnapShot" section of that particular stock.

For example, today, the beta of Stansberry Hall of Famer Microsoft (MSFT) is 0.9, about in line with the market... Meanwhile, Hershey (HSY), another longtime favorite, has a beta of 0.4, meaning it has been less than half as volatile as Microsoft ‒ and the market ‒ over the past five years.

Find this number for each stock you own.

Then, according to Porter, here's what you do next...

Once you understand how much risk you're taking, I suggest rebalancing your portfolio so that you take less risk than the S&P 500. Remember... you want to be cautious when others are greedy.

We'd say the S&P 500 returning 31%, 18%, and 27% in each of the last three years – with the 2020 onset of the pandemic being the "low" performer – could qualify as people being greedy today.

He continued...

You can lower your risk by selling down risky positions and building cash in your portfolio. You can also lower your risk by adding hedges that have a negative correlation to the stock market, like short selling positions.

The second piece of advice has to do with position sizing...

Out of all the studies Porter has read over the years about portfolio risk-management strategies, he says no tool is more powerful than "risk-based position sizing." As he said...

In other words, whether you followed hard stops, trailing stops, or "VQ" trailing stops (which are based on a stock's individual volatility profile)... the biggest improvement to portfolio performance came from using a position-sizing strategy that equalized the capital at risk in each position.

This year, give yourself the best chance at success. Rebalance your portfolio so that you're risking the same amount of capital in each position.

You can do this with one click on a platform like TradeStops, which will tell you exactly how many shares of each position you should own to spread risk evenly across your portfolio... It's both a simple and very powerful tool.

You end up using wider stop losses on riskier positions – giving them room to be volatile and not leaving potential gains on the table... But you also reduce your level of risk because they will be much smaller positions than your safer holdings.

If you want to do this yourself, you can approximate the approach by using each stock's beta to adjust your position size. As Porter wrote...

If a stock has a beta that's less than 1, then increase your position size until multiplying its beta by that factor will equal 1. And do the inverse for stocks with betas that are greater than 1. Doing so will give you a risk profile that's equal to the markets. If you want less risk, then standardize to a beta of 0.99 or less, depending on how much risk you want to take.

The important thing is to make sure that you're taking the same amount of risk in each position. Nothing else you can do this year is more likely to increase your portfolio's return.

If you're comfortable with a portfolio that will swing wilder than the S&P 500, for better or worse, you'll want to try to hit a beta greater than 1...

Remember, a beta greater than 1 is more volatile than the market, and a beta of less than 1 is less volatile than the market...

If you haven't done this exercise before, give it a try today or the next chance you have...

At the very, very least, once you're done, I guarantee you'll have a better handle on your portfolio – and the varying amount of risk of the individual positions within it.

You will know specifically how much risk you are taking compared with the overall market. Then you can think about adjusting your allocation, based on your goals and comfort level... or you can ignore our advice entirely and go about your day.

Most people will do that... Don't be one of those people. As Porter concluded in his essay...

As I've said before, you also want to make sure you're investing for the long term in high-quality, "capital efficient" businesses. That's the best, safest, and surest way to get rich in stocks. But don't neglect these two important steps.

I know hardly any of you will take these concepts to heart... Fewer will actually take action – even though it's one of the simplest and easiest things you can do. But they can make you a fortune over your lifetime.

You might also do this exercise and find that all is well... and that your current investment mix aligns with your goals. If so, that's great... You've been doing the right thing all along. Either way, let us know how it goes for you with an e-mail to feedback@stansberryresearch.com.

Rickards: We've Seen 'Peak Inflation'

Bestselling author Jim Rickards expects "inflation to come down very quickly" because of interest-rate hikes expected from the Federal Reserve in 2022... He also talks gold, the dollar, and bitcoin with our editor-at-large Daniela Cambone ‒ and says having money on the sidelines right now is vital.

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 1/3/22): Apple (AAPL), Berkshire Hathaway (BRK-B), CBRE Group (CBRE), CVS Health (CVS), Formula One Group (FWONA), Knowles (KN), Coca-Cola (KO), McDonald's (MCD), ProShares Ultra S&P 500 Fund (SSO), Constellation Brands (STZ), and Vanguard S&P 500 Fund (VOO).

In today's mailbag, feedback on Monday's Digest, in which we talked about the COVID-19 Omicron variant... What say you? E-mail us at feedback@stansberryresearch.com.

"So you took the 'vaccine' (which has no long term safety trials and never will) but you still got COVID? So even you must now admit that the 'vaccine' is useless." – Paid-up subscriber Steven I.

Corey McLaughlin comment: I hesitate to get into this in any detail, but I (and I'm only speaking for myself here) wouldn't say that the COVID-19 vaccines are "useless." Though I will say "We the People" are owed a pretty important clarification or at least a consistent reminder...

It's clear the vaccines won't stop all infections – as many people intuitively believed they would when vaccines started being rolled out.

But, importantly, I do believe the vaccines help the immune system prevent severe illness if people do get infected.

I'll never know for sure what this infection would have done if I didn't get the COVID-19 vaccine – maybe it would be the same relatively OK experience, since Omicron is considered a milder variant of COVID-19 – but I wasn't willing to take that chance to find out.

Others may feel differently, though, and I get that... and the mistrust of government in general.

The bigger economic point – and one that's relevant for investors – that I was trying to make is this... Another COVID-19 wave around the country, and the world, is simply fuel for more inflation for a variety of reasons.

"Hey Gang. Come on, let's just do what at least one of the writers from a sister publication has done. Let's agree that one can't believe a word the CDC or the government says about the pandemic.

"With that out of the way, now we are free to discuss whatever lunatic actions they may take will have on the economy and the markets." – Paid-up subscriber Mark M.

All the best,

Corey McLaughlin
Baltimore, Maryland
January 4, 2022