December 29, 2021
4. Anticipate the Un-Normal
Wait… expect things to revert to the norm (that’s Resolution No. 3) – but also expect the unusual? In a word… yes.
One of our biggest enemies in preparing for the unexpected – whether it relates to markets, our careers, the weather, or what’s for dinner – is the baseline assumption that things will more or less be pretty similar tomorrow… that nothing much will change.
This is called normalcy bias. It’s the tendency for people to think that things in the future will be pretty much the way they have been in the past.
One effect of this is we don’t think much about what could be different… how that might affect us… and how to prepare for that possibility.
And that’s a problem. The answer, though, isn’t to dig a new basement and load it with three years’ worth of baked beans and bottled water as a way to “prepare for the unexpected.”
Instead, try this: Awfulize. That is, consciously and intentionally ponder the worst that can happen. (Dale Carnegie, of How to Win Friends and Influence People fame, counseled this.) Face up to the very worst… rationally understand that it’s very unlikely to happen… and do the obvious things to prepare for something awful. Those are things you should probably be doing anyway.
5. Stick to Your Stop-Loss Levels
It sounds easy: Cut your losses. It’s one of the most important parts of investing – because if you don’t have money to invest, you can’t make money in markets. (As Warren Buffett said: “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1.”)
But it’s not easy at all. Crystalizing a loss – acknowledging you were wrong – is one of the more difficult things you’ll ever do as an investor. The only way to make it work, and to resist the temptation to hold on to a loser in the hope of a turnaround – is to make it foolproof, and (most importantly) emotions-proof.
A stop loss is a pre-determined point at which you sell a stock. It’s a way to cut your losers, and let your winners run. A trailing stop loss – the best kind – “trails” a rising stock because it’s a pre-determined percentage below the stock’s high since you’ve owned it.
For example, let’s say you buy a stock for $10 and put a mental trailing stop loss at 20%. That means if the shares fall 20% to close below $10 (that is, to $8), you’ll sell. (Note that you should use closing prices for your stops – not intraday prices.)
Now, let’s say that shares rise to $12 after you buy. Instead of having your stop at $8, your stop will be 20% below the highest price the stock has reached since you owned it – which is $12. So your stop will be $9.60 (that’s 20% below $12).
Remember, even if the stock falls to $11, your stop will stay at $9.60 because $12 is the highest price the stock reached while you owned it. That means the worst thing that can happen (as long as you monitor the share price… and sell according to your stop loss!) is that you lose 4% of your initial investment. In this way, the stop-loss level helps to preserve your gains.
Where you set your stop loss – whether it’s 10% or 50% or something in between – depends on the volatility of the share price, your time horizon, and your risk appetite.
The key, of course, is to honor your stop-loss levels no matter what. That means that if the shares close below your stop-loss level, you sell – no questions asked.
(One important point: Make sure you don’t put a standing market order in at your trailing stop level. You don’t want to tell your broker when you’re going to sell. It “leaves your hand showing” for other market participants to take advantage of you. Make sure that you make it a mental level or a post-it note on your monitor at home – not one that you tell your broker. And then, watch it yourself.)
A new system shows which stocks could soon rise 100% thanks to a Connecticut couple’s catastrophic 401(k) loss.
6. Prepare for a Difficult 2022
Maybe the latest coronavirus variant will fade into the ether and we’ll never need to learn another obscure letter of the Greek alphabet… shares prices will rise… inflation will fade… and purple unicorns that exhale happy pixie dust and poop gold nuggets will greet us in the new year.
But probably not.
In which case, get ready…
Have cash on hand… No matter what – unless things turn really ugly – cash will get you what you need if your debit or credit cards (or Apple Pay) don’t work. But if your cash is in a bank that’s gone bust, or if the ATMs stop working, money in the bank won’t do you any good. So keep enough cash in a home safe to get you by for a few weeks – or a few months, preferably.
Despite the best efforts of the U.S. Federal Reserve, the U.S. dollar is still the default global currency. Almost anywhere in the developing world (and in much of the rest of it), a U.S. $20 bill can fix a lot of problems very quickly (and a Ben Franklin can fix the rest of them). Just keep enough of them in a safe place nearby.
Keep cash in your portfolio, too… Cash won’t triple in a year, or yield anything more than pennies. And meanwhile, inflation eats away at it. But cash will always be king. It helps you hedge your portfolio: If every stock you own falls, cash will be worth as much as it was yesterday. Cash represents buying potential… When markets fall, the buying power of cash increases.
Legendary investor Jim Rogers explained his approach to investing this way: “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.” That is, when obvious investment opportunities arise, take advantage of them… and to do so, you need cash. Not a lot, but enough.
Buy gold… It’s the ultimate form of insurance. It’s maintained value better than any other asset over time, its value tends to rise during times of crisis, and it’s small and easy to transport. And if the world goes Mad Max on us, you might even be able to buy groceries/transportation/guns with it when that cash you have under the mattress is worth nothing more than the warmth it generates when burned.
Download today what you might need tomorrow… In a world where cyberattacks are as common as snowflakes in Siberia, it’s asking for trouble if you assume that your personal data and records that are online – bank or brokerage statements, for example – will be there when you most need them.
Periodically download personal records and store them someplace safe – whether that’s printouts or your hard drive (with a backup in the cloud, and another on a portable hard drive). The last thing you want to do when chaos hits is be stuck on perma-hold to speak with a faceless customer-service agent who wants to do nothing more than get you off the phone as soon as possible when your financial life is hanging in the balance.
Will it happen? Probably not. But in case it does… it’s better to be prepared. And in the meantime, happy new year.
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Executive Editor, American Consequences
With Editorial Staff
December 29, 2021