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Money Map Report
A: Not to be trite, but sometimes there isn’t an explanation. Under the circumstances, the most important thing is that we exercise our discipline and exit the trade to protect both our capital and our profits. Studies show that doing so can dramatically increase our returns over time, no matter what the “story” turns out to be.
A: There are a couple of reasons we wouldn’t want to have a trailing stop on a trade.
In some cases, we want to “average down” if the price falls, which allows us to do one of our favorite things: buy stocks we want at bargain prices.
In other cases, we’ve captured “free trades” – trades that doubled in value, effectively giving us the position for free, which we allow to run.
And in still other cases, like with the Rydex Inverse S&P Strategy Fund, the stock forms a core holding, and we don’t want to get stopped out on a dip.
The important thing to remember is that Money Map Report portfolio has multiple levels of protection built into it, to make it as sound as possible under the broadest range of market conditions. I don’t want to leave anything to chance, if I can help it, and I don’t want you to, either.
A: Studies show that investors who utilize strict rules like trailing stops – even though they can result in losses from time to time – do better overall than those that don’t.
Trailing stops offer three key advantages: 1) They keep you from selling your stocks during powerful uptrends; 2) They prevent small losses from becoming catastrophic losses; and, 3) They keep you from flying by the seat of your pants and letting emotion creep into your investing decisions.
A: That’s a question I get a lot. We don’t invest in Facebook Inc. (NasdaqGS:FB) because Facebook is a stock best suited for speculators and traders. It’s at 100+ times earnings and has very little going for it other than the hope that social media may pay off, and the illusion that it represents a new way of doing things. Consequently, Facebook doesn’t fit our safety-first mandate.
That said, I know that many readers have money outside the MMR recommendations, including shares of FB and TWTR. If you’re one of them, be careful… there may be more gains ahead, but ask yourself if you could stomach the losses if it breaks down.
A: Certificates of deposit (CDs) are great if you need to lock up your cash for a future expenditure or if you’ve earmarked the money for emergencies. Otherwise, consider a short-term bond fund, like NEARX, which still gives you the flexibility you may want plus a higher short-term rate. It’s one of the few instances where the risk may be worth the reward. I don’t believe the rates on longer-term instruments carry enough of a premium to justify the risk of principal loss, any more than I think locking up your money makes sense right now given the Fed’s outlook.
My broker is suggesting “floating rate bonds” as protection against rising rates. What’s your take?
A: Floating rates bonds sound attractive because the rates are tied to short-term benchmarks like the LIBOR. The thinking is that as rates go up, the bonds adjust concurrently. Tread cautiously, though. Many companies that use floating rate loans are higher credit risks. That means the default rate is higher, too. You don’t want to get caught holding the bag.
A: No way! And here’s why: According to research done by Barron’s, 85% of all buy/sell decisions are incorrect. That’s because emotional bias drives bad decisions, particularly when it comes to attempts to time the market. More than 90% of portfolio volatility comes from allocation. Get that right, and chances are good you’ll come out way ahead of the game, especially if you use our 50-40-10 portfolio.
A: A “DRIP” is a program you can set up with your broker that allows you to use your dividend payments to buy new shares of the company. It effectively allows an investor to passively build a larger and larger position in a stock without ever having to shell out another dime to buy new shares.
The beauty of a DRIP is that it takes the guesswork out of when to buy more shares. For longer-term investors, we think a DRIP program is one of the best uses of dividends. Our research indicates that re-investing dividends can increase your overall performance by roughly 40% over the course of 10 years. That adds up over time, especially when you consider that if you hold a position long enough, the dividends eventually pay for the initial investment… and then some. Which means you then own the stock for “free.”
It’s not uncommon for longer-term investors who have followed this approach to receive more in dividends than they spent on their initial investment!
A: Perhaps in the short term. But longer term, dividend-paying stocks remain one of the smartest, most efficient investments available. They account for 80% to 90% of total stock market returns over time.
That said, all dividend payers are not equal, especially now. I view high payout ratios, slowing growth, and ultra-high dividends as bigger risks than they used to be. Stick to the “steady Eddies,” like those we have in our portfolio, with long, stable dividend histories. Use dips as buying opportunities.
Shah, I’ve got some really super profits built up in biotechs, but I’m concerned by the recent pullback. Should I lighten up?
A: First off, congrats on the profits and way to go!
Now, it would be inappropriate, not to mention illegal, for me to provide you with personalized advice. I don’t know nearly enough about you, your investment goals, and risk tolerances.
But I will say that one of the best things any investor can do is take money off the table.
Practically speaking, the fact that you are wondering about taking profits tells me that’s probably an appropriate thing to do. That’s important because we all have common sense as kids… it’s just squeezed out of us as adults.
Case in point – and we’ve all been there – is the temptation to let investments run in the name of bigger profits.
The problem is that nobody knows if and when a correction will hit – not even me. That’s one of the reasons I encourage the use of trailing stops (see below). The trailing stop accomplishes three things: 1) you can ride the bull still higher if the markets want to run, 2) you keep risk to razor-thin levels, and 3) you take emotions out of the equation.
The way I see it, you can never go broke taking profits.
A: That’s a great question – especially since gold has taken a beating lately. I like gold because it insures us against crisis. Despite widespread belief to the contrary, gold has never been an inflation hedge. But is a great crisis hedge.
Research shows that there is a 10:1 relationship between gold prices and bond coupon rates (which are related to inflation). Over time, the two move such that having $1 in gold for every $10 in bond principal can help immunize your bonds, while “insuring” your hard-earned income.
Don’t forget, gold is not just about individuals any more. Entire governments are buying to preserve their purchasing power – just like we are, albeit on a much smaller scale.
I was blindsided in 2007/2008 when the market turned. How can I tell if the markets are getting ready to do it again?
A: By remembering this fundamental truth: Healthy markets have strong internals. What I mean by that is broad swathes of the market go up in unison, rather than just a few big name stocks that camouflage general weakness.
You can check yourself by examining the number of advancing versus declining issues – the number of stocks that are going up next to the number of stocks going down – in most charting services.
At StockCharts.com, for example, key in “$NYAD”, check “cumulative” in the “type” window, and then hit refresh. (StockCharts is just the first example that came to mind. There are plenty of other excellent free charting services out there.)
When it’s rising and making new highs, that’s a sign of strength. When it’s falling, things are weakening.
A: Investment discipline is knowing your strategy for a trade – both if it goes well and if it goes badly – and sticking to it.
Too many investors second-guess themselves. They confidently talk about exiting a position if the position trades down to particular level – while it’s on the way up. But a funny thing happens when the same position starts trading down, especially when it reaches the point where they originally claimed they would sell the position. A lot of investors will make a new set of rules and allow the position to trade to an even lower point before they sell – if they ever sell at all.
There have been volumes written about why investors do this. But the main reason, it seems, is that these same investors don’t really have a discipline. They know “why” they bought the position, but they have no idea what to do with it after they own it.
That’s one of things we mean when we talk about “having a discipline.”
One of the most important lessons investors can learn is how to understand their position from start to finish – before they enter the position in the first place. Knowing when you are going to exit the position if it is a winning trade and knowing when to exit the trade if it is a losing trade will take all the guess work out from the get go. That’s having an investment discipline.
The portfolio seems to have a lot of “Rocket Riders” in it. When are we going to see some more “Growth & Income” recommendations?
A: Thanks for staying so focused! Your question raises an important point about portfolio rebalancing.
Rebalancing is the periodic adjustment of your own investments to reflect market conditions that have changed, buying and selling specific investments in order to bring your risk down and boost your returns. It’s a vital part of having an investment discipline.
Here’s how that works. Say John has $10,000 invested in the model portfolio: $5,000 in Base Builders, $4,000 in Growth & Income, and $1,000 into Rocket Riders.
A year later, John finds his Rocket Riders have appreciated by $500, his Growth picks are up $2,000, and his Base Builders have fallen by $1,000. So his 50/40/10 split is now more like 35/52/13. The value of his overall portfolio is up by $1,500, but his risks are mounting.
That’s where many investors find themselves now. The markets have run up some 150% from their March 2009 lows. Anybody who’s got stocks and who hasn’t rebalanced is just asking for a repeat of 1999 – or 2007 if (or when) things roll over.
Fortunately, the solution is very simple. To get back to his preferred 50/40/10 split, John “rebalances.” He harvests $350 in gains from Rocket Riders stocks, sells $1,400 from his Growth & Income holdings, and puts the proceeds ($1,750) into Base Builder choices (which have lost value and are therefore “on sale”). Now his risk is appropriately distributed again.
If you’re interested, you can find additional discussion of rebalancing on page 62 of “The Money Map Method.”
I understand how The Money Map Method works. How do I actually do it? Is there a suggested allocation to get started?
A: How you actually follow the Money Map Method depends heavily on your personal goals and risk tolerances as an investor. Since it’s not possible for any of us at The Money Map Report to know what those are, it would be inappropriate – not to mention illegal – to provide specific, tailored advice.
That said, the 50-40-10 portfolio works the same with $5,000 or $500 million. Careful study shows that having 50% of one’s assets in the “Base Builders” is optimal. Right now, there are five holdings in the Base Builders section, so that would work out to roughly 10% of your portfolio per holding. So, for example, if you’ve got $50,000 to invest, that would work out to putting $5,000 into each Base Builder.
If you’re just getting started as an investor, I recommend splitting your investments into four equal chunks that are going to be invested over the course of four quarters. That way, you can begin harvesting the strength of the 50-40-10 but also have capital available for new recommendations using a form of “dollar-cost averaging.” It takes a bit more time and effort, but I think that’s merited with the markets as volatile and unpredictable as they are.
If you’re interested in a general overview of position sizing, Dr. Van Tharp has a very good one at this link: http://www.vantharp.com/tharp-concepts/position-sizing.asp
A: Welcome to the team!
First, realign your thinking. Group your stocks according to the 50-40-10 model we describe in “The Money Map Method,” with an emphasis on establishing your Base Builders first – that’s 50% of your portfolio. I recommend starting with the Vanguard Wellington Fund (VWELX).
Next, flesh out your Global Growth & Income choices. These are the globally recognized brands with strong balance sheets and pay above-average dividend yields. They should make up 40% of your portfolio.
And third, once the bulk of your assets are protected and earning a solid return, begin adding Rocket Riders for some extra “spice.” These selections comprise just 10% of your portfolio.
Do not “cherry pick” your holdings- that’s a recipe for disaster. And never chase a recommendation if it’s above a suggested buy-up-to price. Instead, wait for a price dip or a new recommendation. This may be frustrating if you want to get everything rolling at once, but never lose sight of the fact that the market moves in cycles. Chances are, you’ll get another shot sooner or later, so by all means, wait until you can get in without taking on undue risk.