S&A is closed on Monday...

S&A is closed on Monday… Fools in Wisconsin, fools across Amerika… Why cash matters… Government-backed portfolio repair… Lies, paper money, and unions… How to break the bounds of your normalcy bias… Please note… our office is closed Monday for Presidents Day. Look for your next Digest in your inbox Tuesday.

We're going to talk about cash today – why it's important, how to manage it, and the role it should play in your investment portfolio. We want to pass along a simple secret that will enable you to make 15%-25% a year on your cash. Once you're making this much on your cash each year, you'll become a vastly better investor.

Why? Simple: If your default position (aka doing nothing) earns you 15% a year, you become much more selective about the risks you're willing to take. And the single most important thing you'll ever learn as an investor is to avoid risk. Sure, I know all the financial textbooks say the opposite. But trust me… they're leading you astray. Risk doesn't equal reward in the markets. Risk equals loss. Fools take risks. Don't be one of them.

As longtime subscribers know, we use Friday Digests as an attempt to educate our readers. We should know better: Nobody wants to learn anything. Readers want to be entertained. They want a hot stock tip. Nobody wants to actually learn anything. School is out, as they say. And yet, we carry on…

If you're a new subscriber, please read our earlier essays about why bonds are better than stocks for individual investors. Please read our essay on why you should almost always sell puts instead of buying stocks. We think these two ideas alone will greatly increase your investment returns, primarily by reducing your investment risks. These are real secrets… and they work. Today, we're going to teach you another powerful secret – how to always earn double-digit annual returns on your cash.

Before we get to the investment strategy stuff, we have to make a comment about what's happening right now in Wisconsin. Surely, you've seen the news. A Republican governor is trying to balance the budget by making state workers give up some of their union privileges and asking them to begin contributing to their own pensions and paying a bit more for their health care premiums – 12.6%, up from 6%. I don't want to get bogged down in the details, because they don't really matter. Here's what matters and what in my mind hasn't been explained to the American people: The budget deficit in Wisconsin is $137 million this year. Over the next two years, the projected budget deficit in Wisconsin is $3.6 billion. That's more than 10% of the budget.

Now, we could show you that Wisconsin's state employees are overpaid compared to their private-sector counterparts. We could argue point for point about the role of unions in government, etc. We could do the Democrat vs. Republican stuff you'll surely see on TV. But none of that stuff approaches what really matters in this situation. This isn't a political issue. What really matters here is the plain truth: The people of Wisconsin cannot afford their government. That's not a political statement. That's an economic fact.

There are 5.6 million people living in the state of Wisconsin. The state is spending $32 billion per year. That's $5,714 per person. The per-capita income of the state (how much each person living in Wisconsin earns per year) is only $25,000. Thus, the people of Wisconsin are spending 20% of their total income on their state government. You can add another 20% to pay for the federal government… and another 2%-3% for local government. When you add it up, you'll find government now makes up more than 40% of the economy. The same is true almost everywhere in the United States. It should be obvious to any rational, thinking person that when we're spending more than 40% of our GDP to govern ourselves, we are doomed.

When I write about the End of America, I'm primarily talking about the end of the U.S. dollar's special role in the world's economy. But I'm also talking about the end of America's reliance on debt and "big" government. The two ideas are directly related.

We are the only country in the world that can legally print the money we need to repay our debts. Every other country has to earn dollars in trade in order to repay dollar-denominated debts and buy critical commodities, like oil, coal, and wheat. This incredible power has allowed American politicians to make enormous promises to the electorate. There was no fiscal limit to their ambitions.

As a result, we've lived so far beyond our means we've completely forgotten there is a limit to what we can spend. We are now approaching that limit. The budget crisis in Wisconsin is merely the first of these wake-up calls. Americans are NOT going to get what they expect from their huge investment in government… They're going to get what they deserve.

Please, if you haven't yet taken my warnings seriously… not much time is left. If you're expecting the government to protect you… if you're expecting the government to live up to its promises… you're a fool. The government is bankrupt. And its paper currency is about to collapse. It's nothing more than a lie – the lie that you can live at the expensive of your neighbor.

Now… about cash. There are three secrets you need to know when it comes to managing your cash. The first secret may surprise you: You ought to keep at least 25%-35% of your investment portfolio in cash. That's right. There are certain times when you want to be fully invested, but they're rare – late 2008/early 2009, for example. We were pleading with readers, "This is it – your best opportunity to buy stocks in a generation." At times like that, deploying all of your cash makes sense.

Now is not one of those times. Stocks are soaring. Values have disappeared. I recommend raising cash. You can do so by not reinvesting your dividends. You can do so by not reinvesting the cash when you sell a position. You can do so by not allocating additional cash to new positions. Here's the key thing to remember: Most of your capital gains will be decided by when you buy, not when you sell. Buying at the right price requires you to have cash available. That's why you should almost always keep 25%-35% of your investment assets in cash. It's the only way to ensure you'll have money to allocate to stocks when they're attractive.

Most investors don't like holding cash because they know inflation is destroying its value and they don't believe they can earn a decent yield on it. They're right about inflation. They're wrong about yield. You can typically earn 15% per year on your cash – or even more – if you learn how to invest in mortgage REITs. These are stocks like Annaly and Hatteras. We've explained exactly how they work and when to buy them several times in our newsletters (like in the December 2008 issue of Stansberry's Investment Advisory).

The trick is to buy these stocks when they're trading at or below book value. You also have to understand how they take advantage of the Fed's manipulation of interest rates. If you learn these two concepts, you'll never have a hard time making a lot of money with your cash again. It's easy. Anyone can do it.

Now I know some of you are saying, "Wait a minute… Holding Annaly isn't the same thing as holding cash. That's a stock. Its price fluctuates." While it's true Annaly's price fluctuates, its value doesn't. You'll have to read our research on the stock to understand what I mean. But the simple truth is, Annaly's shares are virtually the same thing as buying U.S. Treasurys, because the Treasury has guaranteed all of Annaly's assets. Holding that particular stock is the same as holding cash. This is a critical secret to understanding today's yield-hungry investors.

The other trick about cash is even easier. Chris Weber taught us this secret. You might have seen our video about him… He's a living legend in the investment world. When Nixon broke the U.S. dollar's tie to gold in 1971, Chris figured out that holding foreign currencies would probably be lucrative for U.S. dollar-based investors like himself. Figuring out which currency to hold instead of the U.S. dollar was easy (for Chris). He simply looked around the world and bought the highest-yielding currency he could find.

He began doing this way back in the early 1970s and has been doing it ever since. Each January, he simply buys the major currency yielding the most. This keeps his cash compounding, year after year. He's made 14% annually with this method. That's more than most people make in stocks each year. And he's doing it by holding cash… in a bank. You can learn all about this method – including exactly how to follow it and what brokers can set up the accounts for you – in his report. It's called Max Yield.

He's been writing this report every year for as long as I've known him (15 years). And it's one of the most elegant and useful financial strategies I have ever discovered. I would urge everyone to learn and understand why his approach is so effective. Wouldn't you rather earn 14% a year than what you're being paid on your cash right now? Wouldn't you rather have the option to go to cash and not worry about losing all the upside of stocks? If you could earn 14% a year on cash, you'd become a much better investor because you'd have a viable alternative to making risky investments in the stock market.

Let's talk about why 99% of you will never do this. You will not subscribe to Chris Weber's letter. You will not read his Max Yield report. You will never understand why foreign currencies are superior to the U.S. dollar. You will not begin a simple program to safely compound your wealth. You will do nothing. You will continue on your current, hopeless path. You will complain viciously that you can't make ends meet because you can't get any yield on your cash. You'll complain that the U.S. dollar isn't a reliable currency and holding it has impoverished you. You will tell people it is not your fault, no one provided you with a financial education. You will accuse people like me and Chris Weber of being "un-American" because we have followed the logical path to protect and grow our wealth. Why? Why do the vast majority of even sophisticated newsletter subscribers like you end up in this trap?

It's called the "normalcy." It's difficult for people to try new things or understand something that's a complete break from their previous experiences. Most Americans don't have a passport. Most Americans will not travel overseas. As a result, most Americans will not invest overseas either. They surely won't consider keeping part of their savings in higher-yielding foreign currencies.

This bias isn't logical… But people simply cannot conceive of ideas that are too far outside what's "normal." I understand. It can be very difficult, even painful, to try something new. Here's what I suggest. Anytime you read one of these Friday Digests and you say to yourself, "Yes, that's probably a good idea," but you find yourself unable to take any new action… learn to take a baby step.

You might remember the essay I wrote about why shorting stocks is so important. I know most people will never short a stock, no matter how good my reasoning or how strong our track record. It is too far outside what's "normal" to them. I tell people, "Try shorting one share." Not one stock, just one share. You'll see how it works. And you won't be taking a big risk – less than $50. Even if you never feel comfortable shorting stocks, at least you'll know how to do it. You'll have expanded your horizons and reduced the power of the normalcy bias we all face.

The same thing is true about Chris Weber's currency secret. There is no doubt it works. And there is no doubt his track record is phenomenal. The pure logic is so elegant and clear, it's actually beautiful. This is a simple idea anyone can execute. It's far easier than investing in stocks or bonds. You only make one trade per year – that's it. This strategy will produce annual returns of more than 10% a year – on a cash investment, just holding money in a bank. Think about what this knowledge could be worth to you. Then ask yourself, why wouldn't I learn this technique? Why wouldn't I want to hold my cash in the highest-yielding currency?

And yet… almost no one reading this will take action. It's too far outside what's "normal." Five years from now, we may meet at an investment conference. You'll complain to me that you can't earn any yield on your cash. I'll say, "Have you tried reading Chris Weber's Max Yield strategy?" And you'll say, "Oh no… that's too complicated for me."

But it's not complicated at all. It's the easiest trade you'll ever make… And still, you won't consider it. You've let your natural normalcy bias control you. It happens all of the time.

Get Chris' report. Read it. It will take about an hour and cost you a couple hundred bucks. If it's not everything we told you it is, if you're not blown away by the simplicity of his strategy, if you don't agree with me that it is one of the most beautiful financial ideas you've ever read… no problem. You don't have to make a trade. But if you agree with the things we've said after you've read his report… just try it. Even if you only try it once… even if you only try it with $1,000… or $5,000 – whatever – a token amount of money to test the strategy. By limiting yourself to baby steps at first, you'll reduce the power of your normalcy bias. To find out more about Chris Weber and Max Yield, click here.

Think about it this way… How many things in your life have you never learned to do or taken advantage of, because you felt a little uncomfortable at first? And what happened on those rare occasions where a friend, teacher, or mentor got you to try something slightly out of your comfort zone? What happened then? For me, those were always the best experiences, the most valuable new tools. It's hard to do something outside your normal boundaries. But it's the only way to grow, to live. Learning how to do it is one of the secrets to a great life.

New 52-week Highs (as of 2/17/11): Cenovus Energy (DVE), WisdomTree Japan Small-Cap Dividend fund (DFJ), First Trust DJ Select Fund (FDM), Cambria Global Tactical (GTAA), Mirasol Resources (MRZ.V), Suncor Energy (SU), DirecTV (DTV), CARBO Ceramics (CRR), HMS Holdings (HMSY), iShares Silver Trust ETF (SLV), ConocoPhillips (COP), Abraxas Petroleum (AXAS), Sandridge Energy (SD), North America Energy Partner (NOA), Walter Investment Management (WAC), Integrated Device (IDTI), O2 Micro International (OIIM), Alexander & Baldwin (ALEX), Philip Morris International (PM)

In the mailbag, high praise for Sjuggerud and more accusations of scamming for Stansberry. Such is life. Send your accusations (or praise) here: feedback@stansberryresearch.com.

"I am constantly amazed by Steve Sjuggerud. While everyone is being cautious, he sends out some of the most bullish calls telling us to buy, don't cash out, get into muni bonds. I mean, I'm sure he knows what he's doing but this guy has some serious guts. And he's been spot on. I've always liked his approach but in the face of so much that can go wrong and is going wrong, I just couldn't bring myself to act on his recommendations. I haven't cashed out but I could certainly have made a lot more if I followed him. What can I say? Great job, Steve!" – Paid-up subscriber Mei

Porter comment: Steve has a tremendous knack for spotting opportunities, thanks to his strictly top-down view of the markets and his dedication to rigorous statistical analysis. His track record is nearly flawless over the last three years.

"Ever since Tom left it is clear you are just blowing smoke. The same old same old with a lot of rhetoric! Nothing new just the same old picks. But you seem to constantly send emails about all your new picks if you subscribe for new programs you offer. I think you are operating a scam!" – Paid-up subscriber Simon Griskonis

Porter comment: We must get 10 of these e-mails each week. I must say I'm totally at a loss to understand how someone could perceive that our newsletter business is a scam. I really don't get it. If you don't like our letters, fine. We can part as friends and send back your money. How is that a scam? We know we can't please everyone.

On the other hand, we have thousands and thousands of loyal customers in more than 120 countries including several thousand customers who have paid us for lifetime memberships. Did we dupe all of them? Our letters are widely read on Wall Street and praised in major publications like Barron's. Did we trick these people? I don't get it.

Maybe they're objecting to our advertisements. Yes, we send out advertisements. Most people understand that's how we stay in business. We're not bankers. We're not fund managers. We don't get paid a percentage of your assets. We get paid via subscriptions and that's it. If you like our work, you'll renew. If you don't, you'll move on. That's fine.

But where does all the vitriol come from? How does selling a subscription become a scam? I really have no idea. I'd love to hear from longtime subscribers how they respond to folks telling them that our letters are a scam.

And regarding Tom Dyson, while it is true he doesn't write a newsletter for us anymore, he didn't exactly leave. In fact, we've partnered with Tom on a big, new project I'll be unveiling soon.

Regards,

Porter Stansberry
Baltimore, Maryland
February 18, 2011