EVG Research Team here, and today we have three valuable tips you can use to lock in any profits you've made in the stock market over the last year or so…
Plus we've got a bonus tip that can help you invest like the rich…
Don't Let It Slip Away
One of the thrills of investing is watching your money grow…
So if you've been invested in the stock market over the last year or two, congratulations! You're likely sitting on double-digit returns from the incredible bull market we've seen during that span.
The last thing you want to do is watch those gains slip away.
We're not making any prediction here, but experts are pointing out plenty of warning signs that a market “correction” is inevitable. We gave you five of those warning signs in a recent EVG Research team article.
Fortunately, there are also specific ways to protect and preserve the profits you've already made. Today, we'll reveal 3 ways you can “lock in” whatever gains you've made so you don't have to worry about losing them.
Before we get to those methods, let's just take a quick trip down “market history lane” to show why you may want to take action sooner rather than later.
A Brief History of Stock Market
Dips, Corrections and Crashes
Last week our research team plowed through a giant spreadsheet using the historical performance of the S&P 500 going back to 1928.
The idea was to determine how frequently the stock market crashes… and the data was quite alarming.
But first, a few definitions are in order.
-A “Dip” is when the market loses at least 5%, but less than 10%. Traditional financial advisors consider dips a normal part of the ebb and flow of investing in the stock market. They occur around twice a year on average.
-A “Correction” is when the market loses more than 10%, but less than 20%. Most mainstream stock analysts consider these corrections normal and even “healthy.”
-A “Bear market” occurs when the market loses more than 20% during a downturn, often leading to a recession.
These definitions are not set in stone, but are common terms used by stock market pundits.
A “crash” is when the market falls at least 10% in one day. For example, during the October 1929 crash, three out of four consecutive trading days had such 10% daily losses.
While crashes are rare, “corrections” are quite common. Unfortunately, they can be just as devastating to a portfolio simply because of their frequency…
So how frequent are “corrections”?
Getting back to the history of the S&P 500 performance since 1928, here's what our research uncovered:
Stocks have “corrected” at least 10% from a recent high 89 times during this time period.
That means a market correction occurs once every 11.6 months on average.
Stocks have declined at least 20% twenty-one times, or roughly once every 4 years.
The stock market has declined at least 30% nine different times, or once every 9.5 years on average.
Obviously, these events don't happen on a clock-like schedule. Still, the longer the market goes without a correction, the more people start looking for the inevitable.
Here's What's Making Everyone Nervous…
So the big question is, when's the last time we've had a market correction? Remember, they occur every 11.6 months on average.
This chart gives us the answer:
As the chart shows, we've had 10 “dips” since the March 2009 “bottom.” (that includes the 5.8% dip to start 2014, which is not shown on the graph).
However, we've only had two market “corrections” in the last 5 years … and it's now been 29 months since the last one! That's 18 months “overdue” according to averages.
Here's another interesting tidbit … during that 86 year timeframe we looked at above, the longest span without a market correction was 35 months, which occurred in the early 1990s.
The current “correction-free” bull market we're in is the second longest in that span. And that's making the experts on Wall Street nervous.
Because they all know a correction WILL come. They always do.
And the experts agree: the longer the delay, the bigger the fall.
Darrell Cronk, regional CIO of Wells Fargo Private Bank said it this way last month:
“The correction-less market is now into a 28th month. The longer you go, that risk starts to build. It's normal and healthy for the markets to have a correction, so that is something that is present in everyone's mind.”
That's why we'd like to give you…
Three Ways to Lock In Your Gains
If you insist on keeping your money in the stock market, here are three tips to lock in your gains. (see how the rich bypass stock market risk here)
Tip One: Set a Trailing Stop
This is a technique promoted by many stock traders and investors, including Stansberry Research.
A trailing stop simply means that you make a “rule” for yourself to sell off your stock once the price goes down a predetermined percentage from it's most recent high point.
Here's an example. Let's say you invested $100,000 last year in the S&P index. It would now be worth $130,000, or a 30% gain.
If you set a 10% trailing stop now, you would sell if the value dropped to $117,000 (130k – 10%).
In terms of the S&P's recent high at 1850, you'd sell if it drops to 1665 (1850 – 10%).
This would lock in no less than a 17% gain. Of course, if the stock market continues to rise without a correction, your 10% stop rises along with it, and so does your guaranteed profits.
Pros:
-Trailing stops take emotional decisions out of the equation and locks in profits at a predetermined level
-Allows participation in continued bull market
Cons:
-You'll never sell at the top because when you “stop out,” it will always be at least 10% lower than the peak (assuming a 10% stop)
-Can't be used easily with 401(k) or mutual funds
-You can lose more than your trailing stop percentage in a black swan event
Tip Two: Rebalance your holdings…
Rebalancing is a technique used by professional money managers, and can be done in several ways.
Using the example above, if you invested $100,000 last year and it is worth $130,000 now, you simply sell off $30,000 worth of stock and pocket your profits.
You can then either use that $30,000 for whatever you want, or reinvest it in something that can't lose value, like a Cash Flow Bank account (one of the many investing strategies of the rich).
Pros:
-You lock in profits now and won't lose them if a correction comes soon
-You can reinvest your earnings in safer vehicles to insure security
-If/when the market corrects, you have less money at risk
Cons:
-Your remaining principle is still vulnerable to a market crash
-You won't get to participate fully in a continued bull market run
-Can be hard to do in a 401(k) and may incur large fees in a mutual fund
Tip Three: Use Exchange Traded Options to Hedge Your Gains
This is an advanced technique, but is the most powerful one and is used by hedge fund managers and other professional money managers.
One easy technique is selling call options against your existing shares. For example, shares of the S&P are now trading just above 1800, and the recent high on January 15 was at 1850.
Using a “covered call” technique, you could agree to sell a your shares to someone else in June of this year at 1850, and you will get a “premium” paid to you right now.
For your $130,000, you'd get paid around $3500 right now. If the price of the S&P stays below 1850, you keep the $3500 and this cushions any other loss you might incur.
If the price of the S&P goes higher, you must sell your shares at 1850, which still locks in your current 30% profit, plus you still get to keep the $3500.
Another stock “hedging” technique involves buying a protective PUT to protect your losses. In our example, you'd buy a June 2014 PUT at 1850, which gives you the right to sell your shares for 1850 any time before expiration day in June.
So now matter how low the S&P falls (even if it's 20% or more), you still have the right to sell all your shares at 1850.
This protection comes at a price. It will cost you around $4000 out of pocket today to buy those protective puts for the $130,000 example we're using. And if the the S&P keeps going up, you'll lose the four thousand (but keep the stock).
Pros:
-Locks in profits and in some cases, allows you to profit substantially from a market downturn
-Extremely flexible and powerful
-Can be used strategically in any kind of market
-Protects you even in the case of a flash crash or black swan event
Cons:
-You'll need an options trading account which takes a little effort to set up
-Takes education (our EVG “paper assets” expert teaches how the rich get richer in any market using creative options trading. He does so in language anyone can understand)
Take Action Now
If you have earnings from the stock market, now is the time to take action to protect your profits.
Whether you use one of the techniques we outline above, or whether you just spend some time investigating other possibilities, it's well worth the time and effort to educate yourself.
After all, it's your money and you want to watch it grow, not evaporate in the next market downturn.
And if you'd like to learn how the rich invest (and how they virtually eliminate stock market risk in their own portfolios), here's a free presentation that shows you how you can do it too:
Click Here to Learn How to Invest Like the Rich
Your Partner in Prosperity,
The EVG Research Team
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