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The list of things investors are worried about at the moment is long and hardly distinguished… North Korea, Russia, ISIS, political shenanigans, re-regulation, and more.
But believe it or not, there's a far bigger problem, and it's one that could be far more damaging to your money than any of those things.
Today I want to talk about what that is and give you 10 ways to get around it… profitably.
Not one in 100,000 investors thinks it will happen to them, but the numbers tell a very different story.
Faced with incomprehensible risks, they'll "freeze up."
When this happens, they'll immediately lose the ability to do three crucial things in the pursuit of profits:
- Identify the best opportunities
- Control risk
- Stay in the game
If you're thinking that I'm overstating the obvious, you're right.
I want to make a point.
Making money consistently – and I mean big, life-changing profits – comes down to getting the basics right.
There isn't a fancy trading platform, a stock screener, or a system that will make a difference if you cannot do the three things I just mentioned.
And, if you can?
The world is literally your oyster – meaning you will have your pick of windfall gains year in, year out, and in all sorts of market conditions that flummox most investors and doom them to miserable returns. Or worse.
Here are 10 critical principles that – if you follow them – will keep you on the path to profits as conditions become still more complicated in the months ahead.
Rule No. 1: Invest on the Right Side of Major Economic Trends: That old investing adage "don't fight the Fed" serves as a good example here. Rising interest rate environments make meaningful gains difficult to sustain – unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and they're still getting it wrong. Those investors are likely to get burned again should the markets lose their mojo.
The key here is the Unstoppable Trends we talk about frequently, because they're backed by trillions of dollars that will get spent "no matter what" in key areas like defense, technology, medicine, and more.
Rule No. 2: Think Like a Plumber: Big losses – like six inches of water in your living room – are expensive and can set you back years. Professional traders – and I'm not including the risk-junkie cowboys who drove the derivatives mess to heck in a handbasket – understand this. And because they do, they focus the majority of their efforts on avoiding losses instead of on capturing gains. It's counterintuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you won't have to worry about your assets leaking away, drip by drip.
Rule No. 3: Sell Your Winners: This may seem counterintuitive, but – if you want to succeed – you must sell your winners. Rule No. 2 – thinking like a plumber to prevent losses – is only part of the success equation. To be really effective, you have to take profits, too. That way, you continually build more capital that you can put to work. Think of it this way – every grocery store regularly replenishes its inventory to keep it fresh. You should do the same with the "inventory" in your portfolio, because if you let your stocks sit on the shelf too long, they'll eventually go bad – just like fruit that's past its expiration date.
Rule No. 4: Always Sit in an Exit Row: This rule goes hand in hand with Rule No. 3. One of the most common problems investors have is not knowing when to sell. Sometimes, they'll let a big loss get out of control (which violates Rule No. 2) – or, worse, they'll notch a big gain and then sit on the investment so long that it sneakily turns into a loss. The bottom line is that, up or down, you should always have planned exit points when you initiate a position – and enforce them with "protective stops," adjusting them as prices move in your favor (but never when they go against you).
Rule No. 5: Your Broker Is a Salesman: So, unless you know you want to buy what he has for sale, don't go shopping! Contrary to the slick advertising they create and the image they want you to believe, Wall Street is not a service business. Brokers exist for one reason and one reason only – to sell you stuff and make money… from your money. And the more of your money you give to them, the less you have to make more for yourself. Buy only what you want and what fits your goals and objectives – not the "stock of the day" a broker is pushing to meet a weekly quota.
Rule No. 6: Invest for High Yields: Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform so-called "growth stocks" by as much as 22-to-1. Furthermore, dividends account for a huge percentage of total returns – varying studies have claimed anywhere from 60% to as much as 97% over time. So, don't ignore them!
Rule No. 7: Buy Value: Buying when the underlying value is "right" can mean the difference between pathetic single-digit gains and truly life-altering, market-beating returns. It's hard to make money when valuations – as reflected by price/earnings (PE) ratios are greater than 20. More normal valuations sit in the 12 to 14 range. However, to really make money, you need to buy when valuations have been beaten down into the single digits – assuming, of course, that the company's underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.
Rule No. 8: Start Early and Leave Your Money Alone for as Long as Possible: This is not the same thing as "buy-and-hold" investing. Buy-and-hold is not an investing strategy, it's a marketing gimmick – and, these days, it's more like "hope-and-pray" investing, anyway. The world's most successful investors – think Jim Rogers, Warren Buffett, and the late Sir John Templeton, to name a few – don't buy and hold. And I don't believe you should, either. These experts buy and "manage," confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life as possible and never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when you're ready to cash out!
Rule No. 9: Retirement Is a Lifestyle Issue, Not a Monetary One: When most people think about retirement, they think about safety. Big mistake. The single biggest problem facing all of us today is running out of money before we run out of life. If you've followed Rule No. 8, this shouldn't be a problem. However, if you've thought about safety and have not invested enough, what you're really doing is crippling your ability to earn future income – income you're going to need in order to eat, keep a roof over your head, and provide lifelong life health care. Oh yeah, and have some fun.
Rule No. 10: All Investments Contain Risks – but Not All Investments Contain the Same Risks: For all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. It's unavoidable.
That's because every investment involves risk – the only questions are how much and under what circumstances. Remember, success is not about how much money you can make, but ultimately about how much money you keep.
Put as plainly as I know how, the true secret when it comes to building up gobs of wealth is taking risk properly. Legendary U.S. Army Gen. George S. Patton, Jr., once said: "There is nothing wrong with taking risks." But he also cautioned: "That's quite different from being rash."
I completely agree. Most investors actually make the problem worse by over-diversifying or spreading their money too thinly in an effort to protect themselves, which means they'll never capture the big winners they crave.
In closing, I want you to do me a favor.
Print out this list and tape it to your monitor or your mirror – some place you can quickly reference it when the going gets tough or you've got a case of the "doubts."
That way you'll stay in the game and on track for the profits you deserve.
Editor’s Note: “Must-have” companies backed by Unstoppable Trends are a cornerstone of Keith’s wealth-building strategy. But there’s another type of investment he wants Money Morning Members to know about. It's one of his favorites, a kind of "desert island fund" he'd buy if he had to park his money in one place, "retire" from civilization for 20 years, and come back to a pile of money. Click here to learn more…
The post Follow These 10 Principles All the Way to the Bank This Year appeared first on Total Wealth.
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.