“Don’t let the crowd convince you to panic sell”…
That was our recommendation in the March 11 Daily Cut.
The S&P 500 had just plunged 19% over 15 trading days. The coronavirus had claimed more than 4,000 lives.
And scary headlines were filling up the mainstream press.
But we urged you not to panic and sell your stocks…
So far, the virus has killed 4,371 people… and infected nearly 120,000. And according to folks who spend their lives studying the spread of viruses like this one, it’s just starting to hit its stride.
But as I and my colleagues here at Legacy Research have been hammering on, the worst thing you can do right now is join the crowd and panic.
If you followed our advice and stayed the course, congratulations. It’s proven to be the right thing to do.
And as you’ll see in today’s dispatch, it’s the key to surviving any market crash.
The Daily Cut is the premium e-letter we created for all paid-up Legacy readers.
Monday through Friday, it’s where you’ll find the latest ideas and recommendations from Teeka Tiwari, Jeff Brown, Dan Denning, Nick Giambruno, Dave Forest, Jason Bodner, Bill Bonner, and Doug Casey.
It’s also where you’ll hear from trading greats like Jeff Clark and Andy Krieger.
Many of the ideas we share are about opportunities to make market-thumping profits. And our analysts have done that in cryptos, gold, legal cannabis, gene editing, sports betting, 5G, and trading Brexit volatility.
But there’s no point in making money if you don’t hold on to it.
That’s why I (Chris) spilled so much ink in these pages urging you to stay the course with your stocks.
One of the most important things to grasp as an investor is the difference between a temporary… and a permanent… setback for stocks.
As Palm Beach Research Group’s Teeka Tiwari put it in these pages in that same March 11 dispatch…
We’re in a long-term (secular) bull market. Within each secular market, there are short-term moves in the opposite direction of the main trend.
Stocks can move up, down, or sideways for extended periods. But they don’t go straight up or down.
So don’t confuse what could be a temporary, sharp, panic-inducing drop with an end to the larger overall bull market. Remember, in the last secular bull market of 1982-2000, we saw three drops of nearly 20% or more. And yet, within nine months, the market was back at new all-time highs each time.
It’s all in this next chart…
The S&P 500 is a bellwether for the U.S. stock market. As you can see, it’s 5% higher today than when Teeka made his call.
And the tech-heavy Nasdaq-100 Index has done even better.
It’s up 10.5% over the same time.
Stocks could lurch lower again before the coronavirus pandemic is in the rearview window.
There is still a lot to worry about in the world.
One of them is the virus. As our tech expert, Jeff Brown, has been telling his readers, it’s going to be with us for some time.
The economic damage from the lockdowns is also high on the list.
But if we get another leg lower, our advice will remain the same: Stay the course.
Look at this next chart…
The pre-crisis top for the S&P 500 was on October 9, 2007. That was the worst time to buy stocks heading into the 2008 crash.
But if you’d kept your head… and resisted the urge to panic sell… you’d now be sitting on gains of 83%.
That compares with a loss of 57% if you’d sold at the March 9, 2009, bottom.
From its peak this February to its trough in March, the S&P 500 just plunged 34%.
It was the sharpest descent in history by many standards… outstripping in ferocity even the 1929 crash.
Watching your stock portfolio go down 30%… and more… is no fun. The temptation is to sell everything and go fully into cash.
But just like you never want to be “all in” on stocks… you never want to be “all out” either.
Instead, you always want to follow a sensible asset allocation plan.
I know I bang on about this all the time. But this really is the most critical part of any long-term investing plan.
Studies have shown that asset allocation drives more than 90% of your portfolio’s long-term returns.
You divide your portfolio into different “buckets” – or groups of similar investments.
What you put in your buckets… and how many of them you divide your wealth into… is up to you.
Over at our Strategic Investor advisory, E.B. Tucker recommends five buckets – stocks for the long run, real estate, cash, gold, and speculations.
The Palm Beach Letter’s model portfolio uses eight buckets – stocks, fixed income, real estate, private markets, crypto assets, precious metals, collectibles, and cash.
You could even split your portfolio into thirds – stocks, cash, and gold…
What’s important is you never put 100% of your portfolio – or anything close to it – in one or two buckets.
That way, you’ll never suffer what our cofounder Bill Bonner calls a “ruinous loss” – one you’ll never recover from.
You can read more about how to apply asset allocation to your own wealth-building plan in the new report we put together.
It’s called the “Coronavirus Crisis Playbook.” Chapter 1 is a deep dive on asset allocation by Teeka. As a Daily Cut reader, you can download a print-out-and-keep copy for free here.
Based on Google search queries, over the past 12 months, interest in the phrase “investment book” spiked 150%.
That’s encouraging. Investors should always seek to arm themselves with superior knowledge. And one source of superior knowledge is classic investing books.
If I were putting together a quarantine book library to help me come out on the other side of this a smarter investor, my top three picks would be:
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The Intelligent Investor, Benjamin Graham: The definitive book on value investing from Warren Buffett’s mentor Ben Graham.
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Manias, Panics, and Crashes, Charles Kindleberger: Written by one of the originators of the Marshall Plan, this is the definitive account of how crises lead to panic behavior in markets.
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The Most Important Thing, Howard Marks: Famed distressed-debt investor Howard Marks shares the keys to successful investment and the pitfalls that can destroy capital or ruin a career.
Until tomorrow,
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Chris Lowe
April 27, 2020
Dublin, Ireland