Legacy Research Group

Most investors have it wrong…

They think the secret to financial freedom is to pick the right stocks… or jump on the right trend at the right time.

Getting those things right will certainly set you on the path to lasting wealth.

But the only way to reach your destination is by staying rational through the bear markets along the way.

That means holding on to your long-term stock holdings and resisting the urge to panic sell.

But that’s easier said than done with a bear market tempting you to do dumb things with your portfolio.

So today, we’ll look at the worst mistake you can make as an investor – panic selling when bear markets strike.

And I’ll pass along two strategies to help you avoid this costly error.

First, a warm welcome to new readers…

The Daily Cut is the bonus e-letter we created for all paid-up Legacy Research subscribers.

It’s the publisher of Teeka Tiwari, Jeff Brown, and Nomi Prins.

You’ll also find insights here from friends of Legacy like master traders Jeff Clark and Larry Benedict… and income investing expert Brad Thomas.

My name is Chris Lowe. I used to work as a mainstream financial analyst for Bloomberg competitor Reuters.

But in 2007, I decided to “go independent.” And I became an analyst for legendary newsletter publishing entrepreneur Bill Bonner.

Now, my mission is to showcase the Legacy team’s best ideas for building and holding on to wealth.

I’m also here help you through these difficult times…

Legacy Research is a subscription-based publishing business. That means our only loyalty is to you – our reader.

If our analysis proves insightful, intelligent, and beneficial to you, you’ll keep reading and subscribing.

If not… you’ll move on.

It’s a model we’re proud of… because it’s a win-win. For us to be successful, we must help you succeed.

Of course, it’s easy to make money in a bull market.

But markets are cyclical. And tough times inevitably come for investors in the form of bear markets.

And it’s critically important you don’t make rookie mistakes with your money when they strike.

With that in mind, let’s look at why it’s so difficult to stay the course with your investments when times are tough.

In bear markets, volatility goes through the roof…

Stock prices swing up and down dramatically.

This happens because investors panic when stock prices fall. And instead of staying the course with their investments, they rush to the exits at once.

It’s all in the table below.

It looks at the S&P 500 going back 10 years. And it shows the number of daily moves – up or down – of 1%, 2%, and 3%.

The most common definition of a bear market is a plunge of 20% or more from a peak.

And going back to 2013, we’ve had two of them – one in 2020, when the COVID-19 pandemic struck, and one this year. (We almost got there in 2018, but not quite.)

And in 2020 and this year, we’ve also seen a steep rise in volatility.

We saw 110 daily moves of 1% in 2020… and 103 moves so far this year.

Compare that with the eight such moves in 2017, a year that ended with a 21% gain for the S&P 500.

And there wasn’t a single daily move of 2% or more in 2017. So far this year, we’ve seen 40 daily moves of 2% and 10 daily moves of 3%.

I’m not saying you shouldn’t trade with a slice of your portfolio…

As I showed you last week, trading is a great way to make money in a bear market.

Traders have short-term time horizons. They can profit from falling as well as rising stock prices using options. And big moves in the stock market translate into big gains for winning trades.

That’s why Jeff, Larry, and the other the traders we’ve featured at the Cut look forward to bouts of heightened volatility.

Using trading strategies can be a smart way to take advantage of the dramatic short-term shifts you tend to see in bear markets.

But your long-term stock holdings are different…

As an investor, you’re buying ownership stakes in businesses.

You profit from these businesses over time, as they grow their sales and profits.

Sure, you’ll meet bear markets along the way. But as scary as they are, the one thing we know about these downturns is they’re temporary.

That means the longer you hold onto the stocks in your portfolio, the more likely you are to make money on them.

There’s a recent report by Capital Group. It looked back over 91 years of stock market history. And it showed you’d have made money 73% of the time if you invested in the S&P 500 for a year.

But if you held on for 10 years, you’d have made money 94% of the time.

That’s because after every bear market in history, the stock market has gone on to set a new high.

So staying the course with your investments dramatically increases your chance of making a profit… and avoiding a loss.

How can you stay calm when others around you are panicking?

The most important thing is that you stick to a sensible asset allocation plan.

That’s just a fancy way of saying you shouldn’t put all your eggs in one basket. And it’s something I’ve hammered on in these pages over the years.

As I showed you in March 2021 – when stocks were charging higher – that means not having all of your wealth in risky assets such as stocks and cryptos. As I wrote…

First, it’s never a good idea to be “all in” or “all out” of stocks in your portfolio. Instead… you want to always play defense as well as offense in your portfolio.

That means owning assets, such as gold and cash, that do well in a crash… as well as investments such as stocks, SPACs, and cryptos, which allow you to capture gains on the upside.

You also need to see volatility for what it really is.

As colleague Teeka Tiwari tells his readers all the time, volatility isn’t some freak event that happens to the stock market.

It’s the price of admission we all must pay for a shot at life-changing wealth as investor.

It may not seem that way when the stock market is rising steadily, like it was in 2017… but the gains you earn in your portfolio over time aren’t free.

You earn them by shouldering all the dramatic short-term moves along the way.

If you can do that… and resist letting fear shake you out of your positions… financial freedom is within your grasp.

If not, you’ll keep coming up short as an investor.

Regards,

Chris Lowe
Editor, The Daily Cut