Are The Bulls Running Out of Gas?
As it approaches its eighth year, the aging bull market is in danger of sputtering to a halt. And our readers seem to know it.
Yesterday, I found this simple question in my email inbox: “Where is a safe place?” — Barbara D.
Barbara, the ever-rising market appears to be running on fumes, but investors are pulling a Cosmo Kramer. They’re continuing to drive the car even though the fuel tank is empty, to see how far they can go.
Not familiar with that Seinfeld episode? Well, you’ll understand this: traders keep bidding up share prices to new highs, even though projected corporate earnings growth doesn’t support excessive valuations. Here’s a quick survival guide.
For starters, don’t sell stocks in which you have profits but believe that unrealized growth potential exists over the long term. The last thing you want to do is bail out of a falling market, thereby locking in your losses. You’re usually better off waiting out a downturn, instead of panicking.
The golden rule…
Now let’s take a look at gold, the classic portfolio hedge. We’re not predicting calamity, but today’s dangers are sufficient to make gold a wise choice now.
This bull market is the second longest in history and getting shaky. The post-election euphoria already is starting to fade and could end in a hangover as hard realities catch up with investors.
Donald Trump’s proposals have cheered Wall Street, but the nation is bitterly divided. It remains to be seen whether Trump and the Republican-controlled Congress can maintain their upper hand as political squabbling worsens after his inauguration.
As a general rule, your portfolio should be hedged with about 5%-10% of your assets in gold-related investments. Gold is ready to regain its luster as investors embrace a commodity that’s historically been a safe haven during times of rising uncertainty. An appealing gold-related stock now is miner Goldcorp (NYSE: GG).
Goldcorp currently boasts one of the lowest all-in production costs of any primary gold producer in the world. If gold rises this year, as analysts predict, Goldcorp’s low production costs should pay off in a big way. If you’re more comfortable with a fund, consider SPDR Gold Shares (NYSE: GLD), the largest gold exchange-traded fund (ETF) backed by physical holdings of bullion.
Let’s turn to our team of investment experts for additional hedging advice.
Jim Pearce, chief investment strategist of Personal Finance, suggests that you calibrate your portfolio allocations accordingly:
“With the markets hitting new highs almost every day and with the political and economic situations in flux, finding places to invest now is particularly tough…
The stock market now appears overvalued and in my opinion is likely to experience another correction during the first half of 2017. For that reason, I am adjusting our asset allocation model… by reducing stocks to 35%, increasing cash to 25% and hedges to 30%, while leaving bonds at 10%.”
Ari Charney, chief investment strategist of Utility Forecaster, touts the virtues of funds in risky times. As he explains:
“Even if you’re a hardcore stock-picker, there’s still room for funds in your portfolio. Sure, a fund won’t knock it out of the park in terms of return like a well-chosen stock would. But it can give you the safety that comes from broader diversification if the equities you’ve curated take a hit or fail to keep pace with key benchmarks.”
One of the most widely used devices for limiting the level of loss from a dropping stock is to place a stop-loss order with your broker. Using this order, the trader will pre-set the value based on the maximum loss the investor is willing to tolerate.
If the last price drops below this fixed value, the stop loss automatically becomes a market order and gets triggered. As soon as the price falls below the stop level, the position is closed at the current market price, which prevents any additional losses.
A trailing stop and a regular stop loss appear similar as they equally provide protection of your capital should a stock’s price begin to move against you, but that is where their similarities end.
The “trailing stop” provides an advantage over a conventional stop loss because it’s more flexible. It allows the trader to continue protecting his capital if the price drops, but when the price increases, the trailing feature becomes active, enabling an eventual protection of profit while still reducing the risk to capital.
Over time, the trailing stop will self-adjust, shifting from minimizing losses to protecting profits as the price reaches new highs.
Try these options…
Want to pare back on overvalued stock positions? Jim Fink, chief investment strategist of Options For Income and Velocity Trader, recommends selling covered calls.
A call is the option to buy the underlying stock at a predetermined price (strike price) by a predetermined date (expiration, which is usually the Saturday after the third Friday of a month). The expiration date chosen can be as soon as next month or as distant as two and a half years away from now. If the call buyer decides to exercise the call option, the call writer is obliged to sell his shares to the call buyer at the strike price.
A call buyer seeks to make a profit when the price of the underlying shares rises. The call option’s price will normally rise as the shares do, because the right to buy a stock at a constant strike price becomes more valuable if the stock is priced higher.
The term “covered” means that you only sell the number of calls that equal the number of shares of stock you already own (divided by 100, since each call option consists of 100 shares of stock).
Let’s say that you would want to sell 200 shares of your stock holdings at $50 per share. Rather than place a limit order to sell at $50, you could sell two call options with a strike price of $50 for hypothetically $2 per share. If the stock closes above $50 at expiration, the call options would be exercised by the call buyer and you would be required to sell 200 shares of stock at the $50 strike price.
The benefit of selling your stock through option exercise rather than a limit sell order is that you get paid an additional $2 per share in income on top of the $50 sale price, making your net sales price $52.
Jim Fink explains:
“Options are wonderful and flexible tools that can be used by stock investors to reduce risk and enhance returns…
I think they’ve gotten a bad rap over the years because they’ve been used improperly by ‘get rich quick’ traders rather than long-term investors. As with any tool, options can be abused. But the problem is not with the options tool itself, but in its application.”
This list of hedging techniques is by no means exhaustive; plenty of other time-proven tactics exist. Let’s keep the dialogue going.
If you want additional, actionable steps to protect your wealth in these uncertain times, send me an email: firstname.lastname@example.org. — John Persinos
Private Placements: Lifting the Velvet Rope
When overvalued large-cap stocks finally take a tumble, the small innovators with unique products and proprietary technology should start to shine. Indeed, small stocks are poised for a breakout in 2017.
The iShares Russell 2000 ETF (NYSE: IWM), a proxy for the Russell 2000 index of small- and mid-cap stocks, has jumped more than 11% since the November 8 election, compared to the S&P 500’s gain of 5.2%.
Problem is, investors already are piling into the well-known, publicly traded “small fry,” bidding up their prices.
That’s where private placements come in. If you’re fortunate enough to get entree into a private placement, it’s like having a well-placed insider lifting the velvet rope for you. Private placements can be your exclusive access to riches.
Here’s the exciting part: We recently hired one of the best private investing specialists in the country to guide our readers through this market. And he’s ready to reveal his top three picks you can invest in right now.