There's no way to eliminate risk 100% when it comes to investing.
I can't do it. You can't do it. And if anyone tries to tell you otherwise, take your money and run.
There's just no such thing.
Yet, unbeknownst to most investors, there is a way to make any investment risk "free" under the right circumstances, using one of my favorite Total Wealth Tactics: the "Free Trade."
Not only does this remove risk from your portfolio, but it means you can potentially build profits faster, more consistently, and more securely than you might think.
Doing so is a critically important concept given current market conditions.
We'll always have market corrections... but corrections, I might add, that you don't have to fear if you understand what we're going to talk about today.
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You can read today's column and bin it, or you can rethink what you know about what it takes to achieve the kind of life-altering profits that make the financial future of your dreams possible.
The way I see things, no investor ever has to suffer the ravages of a market correction – let alone a bear market – if they're prepared.
The concept is nothing new.
The allure of risking nothing and gaining everything has been around for centuries...
...the Tulip Bulb Crisis of 1634–1637...
...the South Sea Bubble of 1711...
...the Florida Real Estate Crash of 1926...
...Bernie Madoff's Ponzi scheme...
...Uber...
So, why is it that you hear the term "risk free" in widespread use today?
Because Wall Street only associates risk with loss.
That's why you're led to believe that U.S. Treasuries and other government paper are "risk free" investment choices, even though you and I both know there are risks inherent in every investment.
It's a game of semantics.
It's also a game, incidentally, that Wall Street's big traders desperately want you to play because it forces you to implicitly buy off on the most profitable strategy of all (for them) – diversification.
No doubt you've heard that term before – just probably not like I'm about to explain it to you.
"Diversification" Is a Marketing Tactic, Not an Investment Strategy
Diversification is the idea that if you spread your risk around in different asset classes and investments – like stocks, bonds, cash, real estate, and the like – you'll be better off. The thinking is that not everything can possibly go down at once.
Like risk, diversification is a concept that's been around for a while.
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In fact, the theory was first noted in the book of Ecclesiastes, written around 935 B.C.
It's also mentioned in the Talmud. Even Shakespeare picked up on it in "The Merchant of Venice" hundreds of years ago.
The problem is that it doesn't work.
At least not like legions of Wall Streeters keen to separate you from your money would like you to believe.
Ask anybody who got their portfolio halved twice in the last 15 years – first during the dot.bomb implosion from 2000–2003, and then during the ongoing financial crisis that kicked off in 2008 with a vengeance.
"Everything" went down at once... both times. And people who were "letting their winners run" got taken to the cleaners.
Don't take my word for it, though.
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Warren Buffett notably quipped that diversification "makes very little sense for those who know what they are doing."
The legendary Jim Rogers famously observed that "diversification is something brokers came up with, so they don't get sued." To which he added in a 2016 Business Insider interview on the subject, "If you want to get rich, you have to concentrate [your assets] and think differently."
I agree very strongly.
Wall Street doesn't want you to put all your eggs in one basket because – they'll tell you – it's riskier. To which I reply, "for you," because spreading your money around means they earn higher commissions, they have a greater number of opportunities to pick your pockets, and they can prey on your worst fears.
I believe you've got to think about risk differently in today's highly computerized and interlinked global markets, especially when it comes to how you handle your winners.
Again, Mr. Rogers and I agree.
He notes, and I'm paraphrasing, that you want to put all your eggs in one basket – just make sure it's the right basket, and watch it carefully.
My logic isn't sophisticated.
Risk is not simply a matter of avoiding losses like many investors believe. Rather, it's an important profit management tool, which is how I encourage you to think about it.
Let me explain.
Speaking very bluntly, nobody I'm aware of ever went broke taking profits, but plenty of people have gone broke taking losses. So, it not only makes sense to concentrate your assets using appropriate risk management, but also to harvest your winners when the markets are strong. That way you'll have opportunity at hand, rather than be forced to run for the hills when the markets are weak.
Many investors have told me over the years at seminars around the world that this kind of thinking is only for "fat cats" or the ultra-wealthy.
In reality, the principles driving our discussion today are exactly the same no matter whether you've got $100 in your pocket or $100 million:
- You want to capture profits every chance you get, and
- You want to take risk off the table at every opportunity.
Preferably, both at the same time.
Here's a Real-Life Example of How This Works
I recommended Raytheon Co. (NYSE: RTN) to my Money Map Report subscribers in August 2011 because it was closely tied into one of the single most powerful Unstoppable Trends we follow: War, Terrorism and Ugliness. It was trading at $46.05 a share then.
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By November 2013, the company's stock had risen to $85.19, and dividend payouts had reduced the cost basis to $42.51, so subscribers who followed along as directed were sitting on returns of at least 100%. ($42.51 x 2 = $85.01).
In keeping with what I've just explained, I recommended selling half the position to capture profits and redeploying the proceeds into subsequent recommendations. I also suggested that they let the remaining shares run because they were now "paid for."
I call this a "Free Trade," because you not only get back your original investment, but you maintain all the upside you can handle, essentially "for free." Even better, because you've now recovered the initial cost of your investment, you can stay in the game with not an additional dollar at risk – even if the stock you've just harvested has a sudden reversal in fortune and goes from hero to zero.
Most investors can't say that.
How many times have you seen investors buy something and then rub their hands together with glee as it rockets higher... only to cry in their beer when prices reverse and the value of their holdings tank?
If you're like me, it's lots.
Heck, you may have even made the same mistake – which is a really important reason to rethink what you believe you know about profits and the risk associated with racking 'em up consistently.
Anyway, back to Raytheon.
By capturing profits when they had the chance, subscribers who were following along ensured that their focus was on winning and on new opportunity, not losing their asteroids as is the case for most investors who don't understand the advantages of a Free Trade when it comes to higher profits and less risk.
I say that because as part of that move – selling half their RTN shares – subscribers were left with a remaining position in Raytheon that could literally go to zero and they still wouldn't lose money.
To be fair, Raytheon was not literally "risk free," but I would argue that it's as close as you can get to the term's true meaning if you've recovered your initial investment by selling half.
What I like about doing things this way is that Free Trades work in all kinds of market conditions, on any investment, and can be set up well in advance. That means you don't have to be planted by your computer, nor be an aggressive day-trader, to make it work.
No other technique I know of comes close in terms of simplicity or effectiveness.
Plus, as an added benefit, you know exactly what price is required to harvest your gains – and remove your risk – in advance. In fact, you can set up your order to sell half of your investment for at least a 100% gain the moment you buy a stock you're interested in. Or any investment, for that matter.
In closing, the Free Trade is not about reducing potential at all – like a lot of investors think.
Quite the opposite is true, actually.
Free trades can help you build profits faster and more consistently than ever before, because they ensure you are constantly harvesting winners that allow you to lateral money into a constantly changing stream of new opportunities, even as you let the rest "ride."
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The post How to Make Any Investment You Have "Risk Free" appeared first on Total Wealth.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.