Another look at the selloff in stocks... What happened the last time stocks 'crashed'... What you need to know about fear... What to do if you're holding big losses today...
A quick reminder to begin today's Digest...
We're holding a free webinar tonight at 8 p.m. Eastern time. Our colleague Dr. David "Doc" Eifrig will present a live update on the recent selloff. Attendees will hear Doc's latest thoughts on the market today, including what the correction means for investors, what he thinks is coming next, and what he recommends now.
Again, this live webinar is ABSOLUTELY FREE for all interested readers. But if you'd like to join us, you must register and reserve a spot before 8 p.m. Eastern time tonight.
If you're worried about the markets – or if you're just looking for a safe place to invest new money today – be sure to join us. Click here to reserve your spot.
Longtime readers know our goal here at Stansberry Research is to tell you what we would want to know if our roles were reversed.
And as we mentioned yesterday – if the mailbag is any indication – many folks are still worried about the markets. So in the Digest this week, we've been reviewing our stance on the market and hoping to ease those concerns...
In short, this is not a time to panic.
Despite the headlines of the past several days, a 10%-15% correction is a normal – and necessary – occurrence.
According to financial news website MarketWatch, the market has experienced a correction of 10% or more 31 times since World War II. That works out to approximately once every two years.
The latest correction is the first in 47 months – nearly four years – which is probably why it feels much worse than it should. Folks have forgotten what it's like to experience a broad pullback in the market. But it's important to keep the recent action in perspective...
As fund manager and author Ben Carlson pointed out in his blog yesterday, the recent volatility isn't anything new.
For example, the last 10%-plus pullback in U.S. stocks started in the summer of 2011. You might not remember, but at the time, the market was worried about the so-called "debt ceiling" crisis, and stocks suffered a decline similar to the one we've seen today...
The S&P 500 plunged more than 15% from July 2011 to early August 2011. And as Carlson noted, the market then had four consecutive days with returns of -6.7%, +5.2%, -4.8%, and +4.6%... much more volatile than the moves we've seen so far. But those big moves didn't mark the final bottom.
Stocks consolidated for another month before reaching a slightly lower low in October 2011. In total, the S&P 500 fell nearly 20%.
At the time, we were hearing many of the same fears we're hearing today. Many folks were predicting a new bear market in stocks, and even a return to the crisis conditions of 2008 and 2009.
But as you can see in the chart below, those folks were wrong. The bull market continued. And even accounting for the latest correction, the S&P 500 is up more than 65% since then...
Of course, that's just the last example. But it happens every time the market corrects. Some folks will always predict the worst. It's just human nature.
But the important thing to remember is that no one can consistently predict where the market is headed next. And basing your investment decisions on fear is guaranteed to lose you money.
This is why we repeat ourselves again and again about using proper asset allocation, position sizing, and trailing stops – what we call a "catastrophe-prevention plan" – instead.
If this is just another correction in an ongoing bull market, you'll still have some exposure to the upside.
On the other hand, if this is the start of a bigger decline, you'll protect your capital and have plenty of "dry powder" to buy bargains at the bottom.
Look, we get it... These ideas aren't exciting. Many of you are probably tired of reading about them.
It's easy to ignore these ideas when stocks are moving higher. It's not until times like these when their importance becomes clear.
So we'll continue to mention them... and we hope we convinced many of you to use them prior to the latest correction.
But we know there are likely some folks who didn't... or who are new to Stansberry Research and these ideas...
If you're holding large losses today, it's likely due to a few reasons...
You may have too much money in stocks (poor asset allocation), too much money in individual positions (poor position sizing), and/or you didn't have a defined exit strategy (you didn't use – or didn't follow – trailing stops).
If you find yourself in this position, the first thing you must do is decide on an exit strategy immediately.
What you decide will depend on your circumstances. But you need to know when or why you'll sell each position you own.
If you have too much money in stocks or too much money in individual positions, this will likely include "lightening up" or selling some immediately.
If you didn't use trailing stops – or if you ignored the ones you set – you need to set them now. If you can't stand any more losses, that may mean selling today.
The key point is you must define exactly how much more you're willing to lose and stick to that strategy no matter what. Hoping your investments "come back" is not a viable strategy.
Taking losses is always tough, but it's often the best thing you can do. As our colleague Jeff Clark shared in a private e-mail today...
The simplest solution is to just take the hit and move on. This is also the most therapeutic solution. Losing money is stressful. And that stress can interfere with one's ability to think clearly. Once you take the loss, you eliminate that stress and can now evaluate the situation with a clear head.
Unfortunately, there's no painless solution to large losses. But many new investors have made similar mistakes. The important thing is that you don't allow a big loss to turn into a catastrophic loss that wipes out your portfolio. And then make sure you learn from the experience.
As Doc Eifrig's senior analyst Matt Weinschenk reminded us in a note this morning, the only way to prevent these kinds of losses again is to prepare in advance...
You have no control over the market. You cannot will your stocks back up or "trade your way" to even. This is the last piece of evidence you need to see that investing is about preparation, not reaction.
As of this morning, the market appears to be powering higher. That's in your favor. It's our opinion that the market will rally and we'll be back in the black in no time. But you can take an honest appraisal of your holdings and decide what's truly a quality investment, and what's junk. Get rid of the junk, hold the quality, and wait for them to come back. Take a look at stellar stocks you may have missed out on. If you can get a good deal on them today, those cheap stocks may help offset some losses.
Your real move here, though, is to prepare for next time. The market will have corrections like this again. It will have much worse ones. You need to understand position sizing, asset allocation, and trailing stops, and you need to prepare yourself mentally to trust in a proper plan and ride out market turmoils like these.
New highs (as of 8/25/15): none.
In today's mailbag, a subscriber shares his experience with trailing stops. Send your questions and comments to feedback@stansberryresearch.com.
"I am a True Wealth and Income Intelligence subscriber, and a TradeStops subscriber. I've also been a Berkshire B shares investor for years, since 2004. I got notification from my TradeStops service and also from one of your publications about hitting my stop and selling. I already sold my holdings within my IRA, but haven't sold the shares in my taxable account, which are showing a 74% overall gain worth tens of thousands of dollars.
"This is the 4th or 5th stock that I've stopped out of in the last week, locking in overall gains. Some of them I never would have noticed the declines without the stop service! It looks like I'm going to generate a big tax bill this year. The good news is that my cash balance is growing rapidly, so I'm going to have plenty of cash to buy again when there are new opportunities.
"Here's my question: Should an investor in general ever consider tax consequences in relation to trailing stops? And if so, what are the rules of thumb? I'm really having a hard time emotionally selling off the remaining Berkshire in my taxable account, because I've had it for so long and I'm such a big fan of Warren and thought I'd hold onto those shares forever. I guess I can buy them back again some day, but it feels funny to sell them and let them go.
"I stopped out of Apple the previous time they went into decline and missed the last latest rally (which has now turned into a decline again). But on the other hand, I locked in a big gain on one of your favorite whipping boys, 3D Systems, which I purchased before I started subscribing to your stuff.
"I have to say that learning about trailing stops might be one of the most important investment lessons I've ever learned, and I learned it from you guys just a few years ago. I can't imagine how big of an impact it might make over the rest of my life. I'm still in my mid 40s." – Paid-up subscriber Lars
Brill comment: Most of our analysts recommend 20% or 25% trailing stops for their recommendations. But they're not the only option. The most important thing is to set a clearly defined exit strategy for every position you buy, and then stick to it no matter what... particularly when you're feeling emotional.
Regards,
Justin Brill
Baltimore, Maryland
August 26, 2015
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