It felt as if somebody just flipped a switch.
On September 28, the last trading day of the third quarter, everything was hunky-dory: major indices were trading near records and investment managers were about to put yet another great quarter to bed. In retrospect, the market rally had already been showing some signs of cracking, with bonds falling and stock leadership changing. But something negative almost always hides beneath the market's surface -- they don't call it a "wall of worry" for nothing. As you know, though, markets usually climb this proverbial wall by ignoring the negatives and concentrating on positives.
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Not this time, however. In the first few days of the fourth quarter, a mini-crash sent many investors scrambling for the exits. But guess what -- the market has since managed to also bounce, promptly recovering some of the lost ground in just a couple of trading sessions.
Stop-Loss Orders: The Good And The Bad
This year, for instance, despite two big selloffs (which would have triggered at least some of the automatic stop-loss protection), the market is still up about 3% -- not counting dividends. Stocks, as represented by the S&P 500, are also up 7% relative to where they were a year ago -- also, this does not account for dividends. With dividends reinvested, something that long-term investors should not ignore, the S&P 500 is up about 9% year-over-year.
Nothing wrong with these kinds of returns.
Staying out of the market virtually guarantees portfolio safety – but it also means missing out on these (and possibly higher) returns, a phenomenon called "opportunity loss." On the other hand, not putting any protection -- such as some kind of a stop-loss sell order, for instance -- in place endangers portfolio gains already earned. Stop-loss orders on riskier positions, too, can protect a portfolio against a potentially very large loss; having this protection in place can actually help investors take on a higher risk -- as long as they strictly limit their downside.
Therefore, any active investor has a decision to make: whether or not to put their full trust in the market's long-term returns or to manage its ups and downs at least somewhat.
The former works, especially for investors with long-term time horizons: they don't have an immediate need in cash from their portfolio assets and thus can afford to wait out even long bouts of market volatility.
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But not everybody has a long enough time horizon (or a large enough portfolio of assets) to wait out the downturns. For those who want to stay invested despite having a shorter time horizon or other personal limitations, here's the good news: you can. There are a variety of ways you can potentially manage the market's volatility, with stop-loss protective sell orders being just one of them.
How I'm Handling This Volatility
In my premium newsletter, Fast-Track Millionaire, I do utilize well-defined (and sometimes very tight) stop-loss orders. But at this time, I only use those in our Opportunity Trades, which are designed to be shorter-term and riskier than the holdings I select for our three main portfolios (but can generate a faster and stronger reward, too).
But we also use other methods of actively managing our gains, losses and new portfolio additions.
For one, at Fast-Track Millionaire, I actively watch the way our stocks trade and also watch our stocks' valuations. As the markets get overheated, some stocks can get quite overpriced, while others might remain attractively valued. Over time, selling overpriced stocks and picking out relatively well-priced bargains will pay off big time. There is no guarantee, of course, that you'll sell at the very top -- but that's not the goal; the goal is to make money by taking timely gains and limiting losses -- quite similar to the ultimate goal of a well-placed stop-loss strategy.
Second, at Fast-Track Millionaire, I plan to use market volatility to our advantage. Slowly and methodically, we will continue building out our three portfolios, viewing periodic market selloffs as buying opportunities and market rallies as opportunities to book at least some of our gains. For this type of strategy, higher market volatility is a good thing.
Here's What I'm Looking At Now
I'm a market strategist. That’s a fancy way of saying my job is to buy stocks before they go up. But you could also say I’m an investment detective. I look for clues to the future, gather the evidence, and predict how our society will change.
Then I try to capitalize on my predictions by picking stocks that will benefit. I then release my research in Fast-Track Millionaire.
I've devoted the past 17 years of my life to finding life-changing investing opportunities.
After teaching university economics for nine years, I went to Wall Street. I helped manage a multi-million dollar portfolio... and since joining StreetAuthority, I've been averaging a 49.9% annualized return on my picks. That blows the market's 17.7% out of the water.
But what I found just recently could be the biggest winner of my career. It's the most lucrative opportunity I've ever seen...
I just released a report on the breakthroughs being made in something called "personalized medicine." There's a lot to learn about things like genetic editing that I simply don't have the space to cover today. But to put it simply, I think personalized medicine is going to spark a new wave of stock gains. It will create countless millionaires but it will also disrupt conventional medicine… and hurt a lot of existing healthcare businesses.
I don't know about you, but by the time an opportunity is making headlines, I want to already be invested in it. Because that's how you make the huge gains...