11/30/2006
I'd venture to say that given the current market euphoria, a lot of you probably are sitting on some hefty paper profits right now. But anybody who has invested in the past has no-doubt said to him or herself, "if only I sold when I was ahead."
Alert readers and listeners to my radio show already know the answer: You can accomplish your wealth-building goals and still avoid downside risk.
How do we do it? Well, we use stop-losses on all of our stock positions.
What is a stop-loss? Simply put, it is a pre-set percentage that one is willing to give back on unrealized gains. For instance, if you have a 12% stop-loss, you will sell your fund when it drops 12% from the highest point it reaches from the date of purchase.
Here's a real-life example. One radio listener, we'll call him Gary, allocated 33% of his portfolio to an ETF sector during June 2000. He used a 10% stop-loss on the position. The ETF moved approximately 30% higher, and then fell 10% in mid-October.
Gary was stopped out. He was able to lock up a 20% gain, protect his assets, and begin preparing for new opportunities. Most importantly, he learned just how volatile his sector fund could be. Not surprisingly, if he had held just two more weeks, he would have given back another 15%, or nearly all of his earnings.
How do you set a stop-loss? Before you buy, you make a decision on how much you realistically could stomach losing. I'm not just talking about giving back money -- I'm talking about losing it. If you put $10,000 into a stock fund today, how much could you stand to give up -- $1,000 (10%), $1,500 (15%) or $2,000 (20%)?
Starting from the date of your purchase, you will use this percentage of the stop-loss as the amount that you're willing to sacrifice before you sell the position. At first, you will be protecting your principal. But as your fund heads for higher ground, you will move this stop-loss up with the price movement of your investment; that is, if you have a 12% stop-loss, you will sell your fund when it drops 12% from the highest point it reaches from the date you first invested.
Example: You buy fund X at $50. Fund X moves to $75 over the next several months for a 50% unrealized gain. Then it hits a broad market sell-off and drops to $66. That's a 12% drawdown, so your stop-loss has been hit and you sell the fund. But you pick up a healthy 32% gain!
Perhaps the most frequent question I receive about stop-losses is, "When do I buy it back, Doug?" This question presupposes you will pick the exact same stock, fund or ETF, which you may not. The beauty of selling is that you are able to reevaluate all of your choices and then pick a new position with the greatest potential upside.
Stop-losses have plenty of side effects. You're going to give up money. And there will be times when you lose outright. But it is a safety net strategy that smart investors faithfully employ -- avoiding the tragedy associated with excessive downward pressure and volatility.
One of the best protection mechanisms out there is a stop-loss, but knowing how much you are willing to risk and monitoring your holdings so as not to miss any stop-loss points is essential to sound portfolio management.
It's this kind of sound management you'll get when you subscribe to my Successful Investing advisory service. Successful Investing subscribers know they will be protected when the next inevitable market sell-off begins. Learn how you to can protect yourself from the ravages of a potentially sharp market correction that could eat away at your nest egg. All you have to do is click here.
To find out how to get started with Successful Investing, click here.
When it comes to variable annuities (VAs), I have what could be described as a classic love-hate relationship. I love VAs because they are a great tool to help you enhance your retirement nest egg. They offer unlimited contributions. That feature is great for those who receive some type of windfall, such as an inheritance, a life insurance payout or a big settlement. You also can get the benefits of active portfolio management. Plus, you can select your own type of income stream payout, such as a lump sum or a monthly distribution.
I also hate VAs, since they so often are used by unscrupulous brokers who charge outrageous commissions to gullible investors who often are unaware of what exactly they are buying. I further hate when IRAs are put in a VA, because there simply is no reason for a tax-sheltered investment to be placed inside another tax-sheltered investment. Finally, I hate two popular VA strategies: buying-and-holding your investments without regard to market conditions and the so-called "index" annuities, which make promises of performance that they may not be able to keep.
So, how do you put the love on your side and how do you minimize the hate when it comes to VAs? Well, that's exactly what I cover in my online seminar, The Secrets to Variable Annuity Success. If you want to find out more about these great retirement investing tools, I encourage you to check out my seminar by clicking the link below.
I guarantee that after this seminar, you'll be up to speed on the essentials of smart variable annuity investing.
These days it's very hard to keep up with all of the news that's fit to print on the exchange-traded fund (ETF) front. The average investor could get bogged down in the process of trying to keep on top of the plethora of new developments in ETF land. Fortunately, my crack staff of researchers and writers always are on the job, bringing to my attention all of the excitement that has become the world of ETFs.
The following are a few news tidbits I thought you might enjoy learning about. And, even though I am not currently recommending any of these ETFs, they are funds that every smart investor should know about. The more knowledge you have about these unique investment tools, the more comfortable you'll be when it comes time to actually put these tools to use in your portfolio.
Assets invested in exchange-traded funds were up 9.4% from September to October and now stand at just over $350 billion. According to the Dow Jones Newswires, total assets invested in ETFs are up 29% from the end of last year. As of October, there were a total of 315 ETFs.
A new ETF that began trading in October is designed to give investors access to start-ups, business loans and corporate buyouts. It's the PowerShares Listed Private Equity Portfolio (PSP). This fund does not directly participate in non-listed private equity; rather, it invests in publicly traded companies that invest in private equity. In essence, you are getting access to the very lucrative and once very exclusive private equity markets when you buy PSP.
Exchange-traded funds were the subject of a recent Bank of America Corporation offering. The bank is allowing 30-free stock trades a month to customers with at least $25,000 deposited in their account and these free trades include ETFs. Because ETFs have a lower expense ratio than mutual funds, the elimination of trading fees make ETFs exceptionally attractive to Bank of America clients who traditionally are steered toward investing in traditional mutual funds.
Van Eck Global recently introduced two new sector-specific ETFs. The first is the Market Vectors Environmental Services (EVX), and the second is the Market Vectors Steel (SLX). These new ETFs are the first to target their respective industries.
Worried about managing risk in this uncertain political and economic climate? If you aren't worried, you should be. The risks we all face right now require sound financial stewardship. These days, you just have to know how to protect yourself.
That's why I want you all to click here for your FREE Special Report titled, "The Successful Investor's Guide To Managing Risk."
This Special Report outlines the seven biggest threats to your financial nest egg and how best to mitigate those risks by employing the strategies that have helped to protect Fabian investors for nearly three decades.
If you invest, then you need to worry about risk and "The Successful Investor's Guide To Managing Risk" will help you do just that.
Do you know the factors that are important to measuring your confidence level in your current investment plan? Can you answer the following statements in the affirmative?
I have a solid plan in place with Bear Market Protection (a clearly defined sell-discipline on my holdings) to safeguard my assets if the market suddenly turns.
I know my broker is proactively monitoring my money every day.
I know my investment plan will provide the sufficient asset growth that I want and produce the income stream that I need for my retirement.
I know that my investment advisor is a good value. We have more than just a bull market strategy and we avoid any unnecessary risk for my plan. Fees are reasonable.
I know my advisor is an expert, has the experience and is prepared for any situation.
I am taking advantage of investment tools such as ETFs that keep expenses low.
If you can't answer the majority of these statements with a "yes," then you need to go to our website for more information and a FREE portfolio assessment.
Click here for your FREE portfolio assessment
Don't wait a minute longer. The only thing you have to gain is financial security.
Two weeks ago, Doug and I presented a tele-seminar entitled "5 Steps to Financial Freedom." At the end of the event, we had a great question and answer session. Over the next several weeks, we want to share some of the questions and answers with you.
QUESTION: At 55 years of age, would you advise paying off my mortgage with funds from a brokerage account that is used for long-term investing or should I continue to use those funds for investing instead?
Tim,
Michigan
ANSWER: This is a question that many people with significant assets in their savings and investment accounts ask. At the end of the day, this strategy would be similar to "eating your seeds." While you'll get nourishment in the short run, the crops you need for long-term survival will suffer.
If you are like most people, your mortgage rate is between 5% and 6.5% and you are in an effective tax bracket of 25% to 35% combined between federal and state. With that being the case, the effective rate on the mortgage falls somewhere between 3.5% and 4.5%. If you are a Fabian subscriber, you know that it is possible, if not probable, to achieve gains of 8%-12% on your invested funds. So paying off your mortgage would lock in a return of around 4% and prevent you from earning 8% or more. Over the long haul, this approach makes a tremendous difference in your wealth at retirement.
Let's take Tim's example. Assuming he has a $200,000 mortgage at 6% and is in a 25% combined marginal tax bracket, his mortgage costs $9,000 per year. The $200,000 in his brokerage account earning 8% would generate $16,000 per year by growing as it compounds. By keeping this mortgage, Tim would grow the $200,000 in his account to $443,000 prior to retiring at age 65. This would allow him to eliminate his mortgage at retirement and have an additional $243,000 in accumulated wealth.
Consider the alternative. If he pays off the mortgage now, he would have no mortgage cost and save $9,000 annually. If he invested that savings and earned the same 8%, he would only have $123,000 at retirement. Paying off the mortgage in this example would result in $120,000 less in retirement savings than continuing with his current loan.
For those of you who have accumulated significant equity in the recent housing boom, the numbers can be even more dramatic. If you would like to see how much additional wealth your home can create for you, contact me at 888-944-JOSH (5674) or josh@joshlewis.net.
If you missed the Making Money University Tele-seminar "5 Steps to Financial Freedom", I invite you to listen to the recording available at http://www.dougfabian.com/radio/5steps.jsp. At the end of the recording, you will find out how you can receive several valuable tools absolutely free of charge.
You probably all know by now what a huge fan I am of exchange-traded funds, but did you also know I do a regular ETF profile on my radio show, Making Money with Doug Fabian?
Each week I profile several ETFs and now, thanks to YouTube technology, you can catch a video stream of my live ETF and market updates. All you have to do is click here.
Plus, it’s not just a one-way street anymore when it comes to discussing the markets. Sign up at the website to comment on my videos, send me a message, and get updates when we post new episodes. I broadcast an ETF and market update Monday through Saturday, which is uploaded by 5 p.m. PST. And, if you want to check out past shows, go to our video archive.
Don’t forget, you also can listen to the show through our podcast and live streaming whenever it's convenient for you. It's all at the site, and it’s just another way we are helping you to stay on top of your money.
"Every man builds his world in his own image. He has the power to choose, but no power to escape the necessity of choice."
—Ayn Rand, novelist/philosopher
As Ms. Rand says, you cannot escape the necessity of choice and that is particularly true when it comes to your investments. You must make decisions when dealing with your money. Failure to make sound decisions will lead to a less-than-heroic financial picture. Build your world in your own image, make smart decisions and be sure to think through all your financial choices before you act.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.