With all the negative news that’s right now permeating the global financial markets - hammering stock prices - we wouldn’t blame you one bit if you wanted to stick your head in the sand.
But before you cash out and take that escape route, there’s a stock market chart we’d like to share with you.
The point this stock market chart makes is very simple - and also very powerful. There will be wars, financial panics, recessions and depressions, political scandals and skullduggery, and even global financial crises. But the bottom line is that - over the long run - stock prices tend to head higher, meaning it pays to remain invested.
There are two key reasons why this is so:
- People are remarkably resilient, which means that our stock and financial markets are, too.
- Nearly every crisis that’s sent stock prices lower has ultimately proven itself to be a remarkable long-term buying opportunity.
Dealing With a Dour Outlook
Admittedly, with the stock market staggering, both those points are somewhat tough to embrace at the moment. We understand how you feel; we’re also struggling to come to terms with the same naysayers and doom doctors you hear on the news every day.
And it doesn’t become any easier when you look at short-term stock-market charts and see that the markets have officially dropped into "bear market" territory, with the broadly diversified Standard & Poor’s 500 Index having taken a 22.55% header since its record high last October. The U.S. economy is in the tank and the evidence is mounting that it’s going to stay there for awhile: After all, gross domestic product [GDP] is tepid, unemployment is rising, bank failures are continuing and the global credit crisis we’ve been dealing with is threatening to burn out consumers the way a California wildfire burns out homes.
No doubt about it: Right now, the overall outlook is bleak.
But, again, as the chart shows, these challenges are not insurmountable.
Especially, as I told a standing room only crowd of more than 1,000 investors at the "Agora Wealth Symposium" in Vancouver, B.C., recently, when you take two specific steps to put the odds as much as possible in your favor. Those two steps - which we talk about all the time at Money Morning - are the correct portfolio structure and protective stops.
The Dynamic Duo: Portfolio Structure and Protective Stops
Let’s look at the portfolio structure first.
As longtime readers know, we’ve recommended our proprietary 50-40-10 portfolio structure for years (50% "base builder" investments, 40% "global growth and income" plays and 10% the speculative "rocket riders). Not only is this mix time-tested (and, under the present circumstances, battle-proven), it ensures that we always have the right mix of conservative holdings and aggressive profit plays - no matter what the overall market happens to be throwing our way.
Here’s a brief recap if you’ve just joined us:
- Our "Base-Builder" investments are the so-called "safety and balance" portion of a portfolio, and should account for as much as half its value. Conservative recommendations like these will help protect our money from severe declines - such as the "perfect financial storm" that’s upon us right now.
- The "Global Growth & Income" portion of the portfolio, with its emphasis on dividends and internationally focused holdings, will serve as a thick layer of financial armor and a stream of cold hard cash to tide us through what looks to be a range-bound market for the foreseeable future. This should account for up to 40% of the portfolio’s holdings.
- And, finally, our "Rocket Rider" plays will give us the spectacular upside potential that can beat the markets during good times - even though they constitute only 10% of our holdings.
Now let’s talk about protective stops.
No matter how you "feel" about the prospects of a particular company or even about the outlook for the stock market in general, we advocate the use of protective stops because they help us maximize profits even as they prevent small losses from ballooning into catastrophic ones. And that’s not just in bear markets, either. As the old Wall Street adage tells us: "You can never go broke taking profits." That means that protective stops work in bullish situations, as well as in bearish markets like the one we’re trying to navigate now.
Time and again we’ve heard investors tell us that protective stops cause them to second-guess themselves when they end up selling a company that appears to be trading cheaply or has good prospects. Those same investors tell us how they don’t "feel good" about cutting loose a company that’s a household name, or that is widely believed to be "too big to fail" (itself a badly flawed concept).
But in down markets that could go far lower, cutting loose your losers is precisely what you want to do.
Pan American World Airways, Eastern Airlines, Citigroup Inc. (NYSE:C), The Bear Stearns Cos., MCI WorldCom, Montgomery Ward, Eastman Kodak Co. (EK) and Enron Corp. were all household names once upon a time, too.
Now they’re four-letter words.
And that’s why, in closing, we want you to begin each day by remembering the stock market chart we’ve shared with you today.
Tape it to your refrigerator, banker’s lamp, or computer monitor if you have to.
No matter how bad things could get in the months ahead, history (and this stock market chart) show the markets eventually will turn around.
Just when doesn’t really matter.
What does matter is how well you handle your portfolio and investments in the meantime. For that’s what will determine whether you’re among the losers or the winners when that stock market turnabout comes.
News and Related Story Links:
Gross Domestic Product.
Standard & Poor’s 500 Index.
Money Morning News Analysis:
Federal Reserve Holds Rates Steady at 2.00%, Says "Downside Risks" and Inflation Remain Concerns.
- Limiting Losses (Demonstrative Charts).
The London Free Press:
Basic stock trading rules help avoid common mistakes.
You’re Never Too Big to Fail.
Pan American World Airways.