Editor's note: If you follow a few simple steps, you can earn an "A" on your portfolio...

But no matter what you do, you can't predict exactly what the markets will do tomorrow.

In today's Masters Series – adapted from the August 2018 issue of Stansberry Portfolio Solutions – senior portfolio manager Austin Root explains that the market doesn't have a "crystal ball." However, as you'll see, he believes you can ask yourself four basic questions to make sure you're always prepared for what comes next...

Quizzed by the Groom's Father

By Austin Root, senior portfolio manager, Stansberry Research

At least he waited until after the best-man speech...

During the summer of 2018, I attended a wedding at a New Jersey country club. The bride was my wife's longtime friend. We only knew a handful of folks in attendance, but enjoyed the event. The crowd was festive, the setting was beautiful, and the food was exquisite.

About midway through the reception, I exited the main hall to head to the bar. Along the way, I bumped into the father of the groom, who was also in search of a refreshment.

I introduced myself and congratulated him on the matrimony. He thanked me, and we got to talking, mostly about the day's festivities.

But once he learned what I do for a living, he turned his attention away from his son's big day in the adjoining room and focused completely on me.

And then he asked the question. In my two-decade career as an institutional investor and research analyst, it's the single question I get the most...

"So, what do you think the market is going to do?"

It's probably the No. 1 most-asked question of all of us at Stansberry Research... and likely everyone remotely related to the stock market. And I'd bet that as an informed Digest reader, you, too, get asked the question from many of your friends.

I don't mind it. After all, I'm a market junkie. I wouldn't work here if I didn't love investing and thinking about the markets.

But as we often say, the market has no magic "crystal ball."

For fear of getting too "deep in the weeds," I usually provide a more basic answer. Here was my response to the groom's father...

Well, I don't try to predict what the market will do in the short term, but I'm generally optimistic about the economy and market over the medium term. Of course, more than nine years into a bull market, folks need to temper their return expectations a lot for the next nine years.

Today, we're going to delve deeper into this question to look for a more nuanced – and helpful – answer. To do that, we need to refine the question with four parameters...

1. What time frame?

If someone wants to know what the market will do in the short term – as in hours or days – my answer is, "I have no idea." Markets are erratic in the short term, and it's incredibly difficult to accurately predict their next movements with any consistency.

If you're an investor (and not a trader), forget about short-term movements. Too many unforeseeable and unknowable factors – macroeconomic shocks, institutional funds flows, high-frequency trades, currency fluctuations, tweets from the president, etc. – exist for folks with a longer-term investing horizon to worry about.

Once you're thinking with a longer-term lens, we can move on to the next parameter.

2. What asset class?

When investors become extremely fearful or greedy, many asset classes – from small-cap growth stocks to emerging market corporate bonds – trade with a high correlation to one another.

Under more normal market conditions, most asset classes tend to be far less correlated.

Stocks, bonds, real estate, and commodities – each with distinct investment characteristics, benefits, and risks – trade in different directions. (Some assets trade in opposite directions. For instance, precious metals and U.S. Treasury bonds tend to increase in value when the world panics and other investments sell off.)

That brings us to our third parameter...

3. Which market?

Most of the time, folks are asking about stocks. But even then, you need to know which stock market.

At Stansberry Research, we often use the benchmark S&P 500 Index to represent the overall stock market. Most people are familiar with it, and it includes companies from all major industries.

But the S&P 500 isn't the only stock market... And not all stock markets move in tandem. For example, since the beginning of 2019, the S&P 500 is up about 28% including dividends. Over the same span, the Hang Seng Index of Chinese and other Asian stocks is up about 8% including dividends... and the Bloomberg Commodity Index is up just 3%.

Even among U.S. stocks, size matters. For instance, the smaller U.S. companies that make up the S&P SmallCap 600 Index have underperformed the larger-cap S&P 500 Index by more than eight percentage points this year.

And of course, returns vary among sectors, too. For example, U.S. technology stocks within the S&P 500 are outperforming energy stocks in the index on average by more than 35 percentage points year-to-date.

The first three parameters are the table stakes. For most investors, the final parameter is what really matters...

4. Are you asking about the broader market, or your portfolio specifically?

What you really want to know is how your portfolio will perform.

It's impossible to answer that question without knowing exactly what securities you own. Two investors (let's call them Jane and Joe) can both buy a similar basket of stocks at the same time and still end up with completely different returns.

Consider this: Year to date, the Russell 3000 Index – an index of 3,000 publicly traded U.S. companies – is up about 28%. But roughly 25% of the companies in the index are up more than 40%, while 25% of are actually down for the year. It's entirely possible that Jane's portfolio is up 40% while Joe's portfolio is down, despite investing in the same broad market index.

In Stansberry Portfolio Solutions, we do have answers for all the parameters for our four individual portfolios. So what do we think these "markets" are going to do?

We're optimistic about the direction of our overall portfolios...

Each one should be well-positioned to hit its unique investment goals over the medium term. The Capital Portfolio should produce outsized capital gains... The Income Portfolio should provide a low-risk blend of steady income and growth... The Defensive Portfolio should outperform and protect your capital in a downturn... And The Total Portfolio should deliver reliable "all weather" returns, performing well in good times and bad.

However, sometimes – in specific time frames – we've lagged the market. It relates to a core part of our investment philosophy. And it's something that will always be a part of our portfolios in both the short and long term – risk management and portfolio protection.

In Stansberry Portfolio Solutions, we've talked about the importance of portfolio protection and how our portfolios are specifically doing just that. As Stansberry Research founder Porter Stansberry explained in April 2017...

We launched Stansberry Portfolio Solutions to demonstrate to our subscribers the roles position sizing and risk management play in producing excellent total returns...

We believe the consistency of our results... and our ability to actively hedge will ensure that our portfolios will weather the rough times. Our outperformance, if it emerges, will come during periods when the market is flat or down. We're unlikely to outperform a raging bull market because we're not willing to take the risks required to do so.

We're committed to this philosophy. We don't want to expose your hard-earned money to undue risks, especially more than 10 years into this historic bull market.

The Portfolio Solutions Investment Committee is hard at work to make sure all our subscribers are prepared for what comes next. That means continuing to invest in high-quality companies with sturdy cash flows and potential for both growth and yield.

But we're also cautious, because the only market prediction we can make with complete certainty today is that a correction is eventually coming.

We want to weather that downturn so we can be ready to "play offense" when the next bull market arrives. We hope you'll join us for the ride.

Good investing,

Austin Root

Editor's note: Stansberry Research founder Porter Stansberry, Dr. Steve Sjuggerud, and Dr. David "Doc" Eifrig will broadcast a special message this Wednesday, December 18, at 9:30 a.m. Eastern time. In short, you'll learn how to get just about everything we publish, plus everything we'll publish in the future – for life – without ever paying a regular subscription fee again. But you'll only have 72 hours to act on this offer. Learn more here.