Warning: Don’t Let Fear Of Risk Control Your Trading
Risk seems to dominate our lives now. Schools are weighing the risks of reopening in-person classrooms compared to the risks of under-educating children. Parents are waiting for decisions on those risks so they can consider risks related to their personal circumstances.
Going to the grocery store includes decisions about risk.
It seems balancing risks is all we do now.
But the truth is that this has always been the case. We’ve always been balancing risks. There was always a risk of being involved in an accident while driving to the grocery store, and a risk of being exposed to cold and flu germs while we shopped. Those risks were small, and most of us ignored small risks because we didn’t have time to consider the possible worst-case scenarios of every decision.
Investors — at least successful ones — have always considered risks. In the stock market, there is always a risk of loss, and there are many ways to think about those risks.
A Cautionary Tale
For some investors, the risks are too great to bear.
I saw an interesting article in Wall Street Journal about an investor who moved to cash during the bear market that began in 2008 and never got back into stocks. His rationale for more than a decade has been, “[W]hat I’d rather not do is invest at this point and then see the market plunge 40 to 50%.”
According to the article, that investor is 66 years old. There have been three drops of 40% or more in the Dow Jones Industrial Average in his lifetime. That’s a rare event, yet it drives his decision-making process.
He’s not alone. Many investors focus on the rare event and base their decisions on that remote possibility.
And that’s not the best approach.
I’m going to be honest here — since I first started driving, I have clipped parked cars at least three times while pulling into a parking spot. That’s happened about once a decade. But those rare events don’t keep me from pulling into parking spots.
Instead, I handle that risk by teaching the kids to buff scrapes out of the paint on my car. I manage the risk of that rare event, but I don’t let fear of that event paralyze me.
I think that’s important for investors to realize. There are risks, but we can’t act as if the worst case is a common event.
I’d love for you to let me know if you want to hear more about this subject. Email me with your thoughts on managing risk and let me know if you’d like to hear more of my approach to managing investment risks.
How I’m Trading Right Now
With all this in mind, my most recent trade recommendation over at my premium Income Trader service is an easy one.
If you’ve followed my recent commentary, then you know I’ve mentioned that we’ve made several low-risk trades in the iShares 20+ Year Treasury Bond ETF (NYSE: TLT).
The logic for this trade is simple: Interest rates are at an all-time low, and the Federal Reserve plans to keep rates low until at least the end of next year. Fed policy ensures that there will not be a large increase in interest rates, even if inflation increases. The Fed has an unlimited supply of money available to ensure rates stay where they are, and that makes this a low-risk trade.
The chart below shows how the Fed has tamed volatility in the Treasury market. Blue arrows highlight the dates of Fed meetings.
As the crisis developed in March, markets were volatile. But by April, Fed policy was clear, and TLT has not moved more than 10% since then. With volatility decreasing, now is an ideal time to generate income from TLT.
Add it all up, and I expect my latest trade with TLT to quickly turn into yet another win.
Unfortunately, out of fairness to my subscribers, I can’t share the exact details of the trade with you. But just know that it is possible to make successful trades in this market. While you should factor in risks, you can’t let worries about risk take complete control. If you let that happen, you could wind up missing out on your goals.
It also helps to have an award-winning indicator working for you. We’ve been using my ITV indicator to identify trades since 2013, and have made winning trades more than 90% of the time. And my followers have earned tens of thousands of dollars in income in the process (even hundreds of thousands for some). To learn how you can too, go here now.