Chris’ note: Our mission at the Cut is to help you really move the dial on your wealth. We do this by highlighting the best ideas from the experts on the Legacy Research team. That’s why, today, I’m sharing with you a must-read essay from former Wall Street VP Teeka Tiwari’s analyst Grant Wasylik.
Below, Grant shows why the average investor is his own worst enemy. And he shares five rules for you to take the emotion out of investing and achieve the market-beating gains we target at Legacy. He even shares a simple portfolio suggestion that will give you broad exposure to some of the biggest trends on our radar.
Markets are booming…
The best 12-month performance for the S&P 500 in the last 30 years occurred over the one-year period that ended March 31. Over that stretch, the index gained 56.4%.
Since the pandemic outbreak – a year and a half ago – the S&P 500 has gained as much as 98%. And last Thursday’s high of 4,429.97 was the 42nd record high of the year… putting us on pace for the most record highs since 1995.
It’s just not stocks hitting all-time highs. Cryptos, real estate, and commodities are booming, too.
Bitcoin (BTC) went up as much as 122% this year… And as I write this, housing prices are up 9%… and oil is up 45% this year.
Unfortunately, the average investor likely hasn’t enjoyed these spectacular returns. As you can see below, they’ve done worse than just about everything else over the last two decades…
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Why is the average investor doing so poorly when markets are repeatedly hitting new all-time highs?
Emotions.
You see, the emotional roller-coaster ride shakes many investors out of the market. They buy at tops and sell at bottoms…
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The greatest opportunities often come from new or hated ideas… and when market panic and despair are high. That’s when people are most uncomfortable…
But it’s also the best time to buy.
Today, I’ll show you how to conquer the market fear curve by protecting yourself from the greatest risk of loss… and positioning yourself for the greatest opportunity for gain.
The best way to do this is to avoid the emotional roller coaster…
Imagine buying bitcoin at $20,000… and selling it out of despair when it drops to $1,000… only to see it rise again to $64,000. That scenario happened to many emotional investors.
But these five rules will help you make more rational investing decisions…
1. Diversify your assets.
The secret to building wealth – and keeping it – is diversification. That’s why we publish an asset allocation guide at The Palm Beach Letter each January. It’s our most important issue of the year. (Paid-up PBL subscribers can view our 2021 guide here. If you’re not a subscriber, you can view a summary of our asset allocation model here.)
We recommend a mix of stocks, bonds, cash, real estate, collectibles, cryptos, and other alternatives.
Numerous studies show that asset allocation accounts for 90%-plus of your investment returns. Not only does diversification lead to better returns, it also lowers risk.
2. Have a risk-management plan.
Before you can grow your wealth, you need to protect what you have. The best way to do that is with position sizing.
This refers to the size of a position within your portfolio (or the dollar amount you’re going to trade). Our simple rule of thumb is: If an investment gets stopped out of your portfolio, your maximum loss should be no more than 5% of your portfolio’s value.
If you limit your downside, you can sleep easy at night. And you won’t panic sell at the worst time.
3. Use systematic investing.
Systematic investing simply means investing money regularly.
Sign up for a direct deposit in a taxable brokerage account. Take advantage of a retirement plan, like a 401(k), where you allocate part of your paycheck to investments (maybe even get an employer match). And switch the setting on your mutual funds, exchange-traded funds (ETFs), and dividend-paying stocks to “dividend reinvestment” if you don’t need the income.
4. Tune out short-term forecasts.
The market’s short-term direction is unknowable. No one has a crystal ball. Even experts get it wrong more often than they get it right.
Unless you’re a day trader, daily volatility shouldn’t bother you. So don’t get sidetracked by the noise. Just focus on the big picture.
5. Create a plan and stick to it.
Other than annual adjustments and periodic rebalancing, you shouldn’t deviate much from your investing plan. If you have a life-changing event, reevaluate your plan at that time. But sticking to a plan will keep you from making emotional investment decisions.
If you implement these rules, you’ll be able to ride the stock market to new highs without getting shaken out during
I know these five steps may seem daunting. And you may be thinking, “Easier said than done.”
That’s why I challenge you to put these steps into action. It’s not that hard to train yourself to become a rational investor.
Start by diversifying your assets. The SPDR S&P 500 ETF (SPY)… Vanguard Real Estate ETF (VNQ)… Invesco DB Commodity Index Tracking Fund (DBC)… and Grayscale Bitcoin Trust (GBTC) will give you broad exposure to stocks, real estate, commodities, and bitcoin, respectively.
Plus, you can hold all of these in a low-cost, online brokerage account.
Next, make sure you position size correctly. If you find you can’t sleep at night, you probably have too much invested in one or more ideas.
Then, set up a direct deposit to fund your brokerage account. You can start with $100, $50, or even $10 per month. Choose a comfortable amount that won’t impact your daily life.
Once you’re invested, ignore the day-to-day chatter in the media. If your thesis for investing in an idea remains strong… stick with it, even during periods of volatility. And keep following the Cut. Chris and the rest of the Legacy Research team will keep you focused on the big picture.
Finally, create your own wealth plan and stick to it. For instance, set a goal of how much you want to invest per year. Or commit to raising your direct deposits $10 per month or quarter until you reach your goals. And slowly add new investment ideas to your portfolio.
If you follow this simple game plan, you won’t let fear shake you out of the market at the wrong time. And you can ride your investments to the top.
Before you know it, not only will you outperform the average investor… you’ll also significantly move the needle on your net worth.
Regards,
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Grant Wasylik
Analyst, Palm Beach Daily
P.S. While the S&P 500 hits new highs, one class of investments is on its way to creating more than 800,000 new millionaires over the next three years…
And just like with crypto or companies like Amazon (AMZN), only early investors will see the greatest returns.
Most Americans have no idea about the opportunity before them… or that they can potentially ride its coattails to fortune for as little as $10.