Pity poor Jay Powell…

The Fed chief can’t make up his mind about interest rates.

That’s judging by what he said at a press conference last Wednesday.

He used the word “decision” 15 times… 14 of them concerning indecision on rate hikes.

He also stressed the Fed would stay “nimble.” That’s central banker speak for ready to change its mind any moment.

Investors hate uncertainty. So this is contributing to big drops in stocks and crypto.

For instance, the tech-heavy Nasdaq is down 11% from its peak last November. And the value of bitcoin (BTC) has roughly halved since its peak around the same time.

But don’t worry. If you grasp one truth about investing… this short-term volatility isn’t a concern. 

We’ll get into that in a moment… and why it’s crucial to understand if you want to make life-changing wealth as an investor.

Plus, I (Chris Lowe) will share a six-point checklist you can use to protect your portfolio from this Fed-induced market volatility.

But before we dive in, a shoutout to new readers…

The Daily Cut is the premium e-letter we created for all paid-up Legacy subscribers.

My mission as editor is to make sure you never miss one of our experts’ big ideas about how to really move the needle on your wealth.

That’s why I’ve spilled so much ink on crypto, DeFi (decentralized finance), and NFTs (non-fungible tokens)… the transition from fossil fuels to renewable energy sources… and pioneering tech trends such as gene editing, self-driving cars, and the metaverse.

If our analysts are right, these megatrends can turn small stakes into fortunes.

But it won’t happen overnight…

So if you flee your positions every time volatility spikes, you’ll miss a shot at the massive gains on offer for long-term investors.

Trying to time markets is the biggest mistake rookie investors make…

They think they can predict when stocks will fall… get out before the pain begins… and get back in as stocks recover.

That may sound simple. It may even sound like a good plan.

But turn on your brain…

To successfully time the markets, you need to do three things:

  • Figure out in advance what will trigger a stock market drop

  • Pinpoint when that drop will happen

  • Pinpoint when that drop will end

Now, maybe you get lucky and get all three things right – once.

But I don’t care how smart you are. You won’t get all three right consistently.

Here’s the far likelier scenario…

Like everyone else, you’ll struggle to figure out what will cause a market drop. And even if you get the trigger right, you’ll get out of stocks too early.

Then when they start falling, you’ll be too nervous to buy back in.

This is why the average investor does so poorly…

Independent investment research firm Dalbar publishes a revealing report each year. It analyzes investors’ market timing decisions through their net buying and selling of mutual funds.

And it shows that investors’ worst enemy is themselves.

According to Dalbar, the average mutual fund investor earned a 5.04% return between 1990 and 2020.

That compares with a return of 9.96% for the S&P 500, our regular stand-in for the U.S. stock market.

That means investors who didn’t try to time the market did twice as well as those who did.

Since Dalbar first published its report in 1984, 70% of the average investor’s underperformance has come from panic selling during just 10 key periods of severe market decline.

It’s why the old-timers say it’s not market timing that makes you rich… it’s time in the markets.

I’m not saying it’s easy to ride out market slumps…

Watching our investments plunge scares us. And when we’re scared, we make dumb decisions – like dumping quality stocks due to temporary price drops.

That’s why you must play defense as well as offense in your portfolio.

And it’s where the six-point checklist I mentioned up top comes in.

It’s an investing plan colleague Teeka Tiwari and his team created to keep grounded even in the most volatile markets.

And since Teeka took over our Palm Beach Letter advisory in 2016, it’s helped him gain 519% in the model portfolio versus a 126% gain for the S&P 500.

His checklist is made up of six simple questions:

  1. Is your portfolio diversified? Many studies show that asset allocation accounts for more than 90% of your investment returns. Greater diversification also results in lower risk.

    A good start is owning a mix of domestic and foreign stocks, bonds, commodities, real estate, and gold.

  1. Do you own alternatives? Think outside the box. Get some exposure to alternative assets like collectibles, cryptos, private placements, and annuities. They’ll outperform long term while shielding your portfolio in the meantime.

  1. Do you have a rainy-day fund? Cash gives you flexibility. You never know what opportunities life will throw at you. Whatever they are, cash typically meets the need better than anything else. So it’s crucial to hold some. Teeka recommends allocating up to 10% to cash.

  1. Do you use stop-losses? Stop losses let you control how much you’re willing to lose. They cut emotion from selling decisions. And they protect your investments from devastating losses.

  1. What are your position sizes? This is how much of your portfolio each position makes up (the percentage or dollar amount of your investment). If a position gets stopped out of your portfolio, your maximum loss should be 2.5–5% of your portfolio’s value.

  1. Do you have an allocation to safer stocks? Invest in companies with quality balance sheets, attractive valuations, solid earnings, and strong growth prospects.

Instead of fretting over what the Fed will do next, follow Teeka’s advice and run through the six-step checklist above. It’ll prepare you to withstand both bullish and bearish markets.

Even better, it lets you keep swinging for the fences on the big ideas we share with you… without risking your nest egg.



Chris Lowe
January 31, 2022