Yesterday, we featured an essay from investing expert, Eric Fry, editor of Fry’s Investment Report and The Speculator. In it, Eric discussed one of the biggest financial mistakes you can make … something that’s a retirement killer.
In short, it’s not having any sort of “wealth insurance” or plan to handle financial risk and a bear market. As I’m sure you’re aware, the market has been volatile in recent weeks, so this topic is incredibly relevant today.
In this Digest, we pick back up with Eric. We left off yesterday with Eric promising to share with us two of his six Bear Market Survival tactics.
I hope you’ll take today’s essay seriously, as it’s offered to help you not only prepare for a crisis market, but actually thrive in one.
2 Ways to Protect Your Portfolio Before a Crisis Hits
Eric Fry here. In yesterday’s Digest, I showed you why their lack of “wealth insurance” is one of the worst mistakes American investors make.
And I introduced you to my wealth insurance “policy” — Bear Market 2020: The Survival Blueprint — a step-by-step guide through the six simple tactics that will help you and your family navigate America’s next market crisis.
In that report, I promised to share with you two of my six Bear Market Survival Tactics.
Today I’m keeping that promise.
The American billionaire J. Paul Getty once remarked that his formula for success was to “rise early, work hard, strike oil.”
But if you don’t strike oil, you need other ways to accumulate — and protect — your wealth.
That’s where Intelligent Asset Allocation, our first Bear Market Survival Tactic, comes in.
Of all the tactics that can help you survive and thrive during tough times, few are more powerful than Intelligent Asset Allocation.
With it, you’ll decide how much capital to place in specific asset classes, like stocks, bonds, cash, precious metals, and real estate.
The goal here is to create an “all-weather” portfolio that thrives during up and down markets.
Intelligent Asset Allocation is the nuts and bolts behind what most investors call “diversification.”
To some, diversification seems like a kind of surrender.
And that’s exactly correct!
Diversification is a surrender to the unknown. We diversify our portfolios because we cannot know exactly what the future holds.
Diversifying your holdings across a range of assets can produce higher returns over time, with much lower risk than piling everything into stocks.
Intelligent Asset Allocation functions like shock absorbers on a car. It makes the ride a lot smoother as you go from Point A to Point B.
“Now wait a minute, Eric,” you may be saying. “Don’t stocks, over time, perform better than any other major asset class?”
You’re right. That’s a fact.
But it’s a misleading fact.
The stock market’s strong performance “over time” includes many gut-wrenching selloffs and bear markets that create large mark-to-market losses … and, therefore, large bouts of fear and anxiety.
During the last 90 years, the stock market has produced an average annualized return of roughly 10%. That’s an impressive number. But those 90 years of strong average yearly gains included 11 bear markets in which the stock market fell more than 25%.
During four of those bear markets, stocks tumbled more than 45%.
As you can see, great investment results “over time” are not very comforting when stocks are plummeting like they did in 2008 … or in 1999 … or in 1987.
That’s why Intelligent Asset Allocation — not betting the farm on a single asset class — can be so valuable, both financially and emotionally.
Typical asset allocation strategies fill a pie chart with each of the major asset categories like stocks, bonds, precious metals, real estate, and cash. Each asset category receives a predetermined percentage of the pie.
But in Bear Market 2020, I take a different approach. I begin by defining the objective of each piece of the Intelligent Asset Allocation pie, rather than focusing on the exact assets that fill each slice.
Specifically, I split the pie into three objective-defined categories.
I think you’ll be shocked to see how effectively this simple strategy can ward off harm. But it can’t do it by itself.
It needs help from you.
To optimize the power of Intelligent Asset Allocation, you need to rebalance it on a regular basis, at least annually.
Rebalancing is the “secret sauce” that makes Intelligent Asset Allocation successful.
For more about those categories — and on that secret sauce — you can find out how to get my book by clicking here. But in the rest of today’s report, I want to cover an asset class that offers huge upside potential that can create and compound wealth over time.
This Bear Market Survival Tactic can really “move the needle” and rack up life-changing profits …
Stocks that you hold through good times and bad — especially if they pay a steadily rising dividend — are a critical part of any Intelligent Asset Allocation strategy.
You should think of these investments as your core holdings. Treat these Forever Stocks as your “Elite 8” or “Top 10” — or whatever number you decide on. In total, these stocks should represent about 25% to 35% of your total portfolio.
These are the stocks you hold through thick and thin, unless the rationale for owning them changes significantly or you decide to replace one of them with a different stock.
Wealth insurance relies on more than just a strong defense. It also requires an effective offense. That’s where Forever Stocks come into play.
Maintaining an Elite 8 is comforting for most investors. That comfort gives them the strength and conviction to exercise caution, when appropriate, with the rest of their portfolio.
Remember, my Survival Blueprint is designed for human beings, not robots. Most of the worst investment decisions derive from emotion, not logic.
So just like we can never predict exactly when disaster will strike, we can also never predict the precise moment when prosperity will hit.
That’s why we must prepare for both …
Buying Great Stocks at the Worst Time
Conventional wisdom says that market highs are the worst time to buy stocks. And as I write this, we are at near market highs.
So, I’ll show you why today — or any day — is a good time to buy Forever Stocks.
To do that, let me share something a wise old man once told me: “There’s no wrong way to say, ‘I love you.’” Similarly, there’s no wrong way to buy a great stock … a Forever Stock.
Sure, buying a great stock near a major peak is less ideal than buying it near a major low. But the investment gains that can accrue from buying an excellent stock at the worst time can be astonishing.
Consider a few examples from the past.
Imagine, for instance, that you had purchased shares of Amazon.com Inc. (AMZN) on December 10, 1999, at the very peak of the dot-com bubble … and then continued holding those shares until today. That 18-year investment would have produced a total return of more than 1,500% — or eight times the return of the S&P 500 over that time frame.
But this delightful long-term result reveals nothing about the short-term pain you would have endured. Within two years of making your buy, Amazon shares would have plummeted 95%. Nine years later, your shares would still be down more 50%.
But one decade after your investment, Amazon finally would have moved into the black … and then continued soaring from that point forward.
Netflix Inc. (NFLX) subjected investors to similar big losses before going manic. Anyone who purchased the stock at its 2011 peak would have watched their investment tumble 80% over the next 12 months. But investors who stayed the course until today are sitting on a plump gain of 725% — or five times better than what the S&P 500 did over the same stretch.
Even legendary stocks like Apple Inc. (AAPL) have inflicted extreme pain on shareholders for long stretches of time. Investors who purchased Apple at its 1983 peak were sitting on a 75% loss after two years … and were still nursing a 54% loss 14 years later.
But if they held the stock through to today, they have reaped total gains of more than 20,000%. In other words, their $10,000 investment in 1983 is now worth $2 million. And that’s the result of buying Apple stock at theworst possible moment.
Obviously, I cherry-picked these success stories. But I could just as easily have selected examples from my personal history. Many, many times, my most outstanding investments started off miserably.
In 1999, I produced an institutional research product in which I recommended buying shares of Royal Garden Resorts (now known as Minor International), a Thai hospitality company.
Two years after I recommended it, the stock was down 37%. But I held on.
And despite this dismal start, Royal Garden went on to post gains of:
• 100% after three years
• 500% after six years
• 1,000% after seven years
• 2,000% after eight years
• 2,888% after nine years
Also in 1999, I recommended buying shares of Adidas AG (ADDYY), the German shoe manufacturer. It, too, plummeted shortly after my recommendation. Two years later, the stock was still down 50%.
But after 18 years, the stock had become a 10-bagger — up more than 1,000%. That result was six times better than what the S&P 500 delivered over the same time frame.
In hindsight, I recommended both of these stocks at “the wrong time.” And yet, both of them went on to produce large, market-beating returns.
Obviously, no one would advise losing 90% of your investment to make 1,000% or 2,000% somewhere down the road. That would be silly. A 90% hit from a stock like Amazon doesn’t feel any better than a 90% hit from some unknown penny stock.
But if your reasons for making the initial investment remain intact, a stock that has fallen 90% does not automatically deserve a swift kick in the rear end. To the contrary, you may want to “average down” on the position by buying more at lower prices.
Great stocks need time to flourish … and to compound their successes.
Besides big initial losses, “dead zones” are another difficulty investors face when trying to profit from a great stock. Sometimes, even a great stock will spend many years wandering around in the investment wilderness, accomplishing absolutely nothing.
Consider this real-world example of one well-known stock. We’ll call it “Stock Z” for now.
If you had purchased Stock Z in 1987 and held it for the next 30 years, you would have endured the following setbacks:
• 23% of the time, your stock would have produced an annual loss.
• 8% of the time, your stock would have produced a three-year loss.
• On one occasion during those 30 years, your stock would have spent an entire decade producing a loss.
How would you feel about holding a stock for an entire decade without making one single penny on it?
Well, “Stock Z” is Berkshire Hathaway Inc. (BRK-A), the multinational conglomerate that made Warren Buffett a multibillionaire … and made millionaires out of many ordinary investors.
If you had purchased Berkshire Hathaway 30 years ago and held that stock until now, you would have endured numerous rough patches. Based on rolling 12-month calculations, Berkshire produced a negative return 23% of the time.
It also produced a loss for an entire decade. From June 1998 to March 2009, Berkshire lost 10%. Yet, during the last three decades, Berkshire shares have delivered a staggering 10,000%+!
Obviously, no one wants to endure a 10-year drought of zero returns. In fact, no one wants to spend any time at all losing money. But sometimes that’s an unavoidable part of the investment process.
Even the Berkshire Hathaways of the financial markets will try the patience of investors on the way to delivering their market-trouncing gains. So, if you’ve got a great stock that’s performing poorly, think twice before hitting the “eject” button.
Buying a great stock at the worst possible time can be one of the best investments you ever make.
So, what type of security is a Forever Stock? What belongs in your Elite 8?
While there’s no set definition of a world-class business, I believe they share at least four critical traits.
In Bear Market 2020, I lay out those traits — and show my members some examples of top Forever Stocks.
Moreover, in Fry’s Investment Report, I reveal some of my top stock recommendations each and every month.
To find out how to join us, click here.
Of course, buying the right stocks is just one part of the equation here.
You also have to avoid the “wrong” stocks.
And in my next Investor Place Digest appearance, I’ll disclose my “secret formula” for doing exactly that — and I’ll expose one stock every investor should be dodging right now.
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