Risk Management 02 (Aug 15 - Dec 25)

[winston]

If the Bear’s Near, Which Assets Protect You?

Treasurys, and perhaps some commodities, could hold up best when stocks struggle

http://www.wsj.com/articles/if-the-bear ... d=yahoo_hs

[winston]

How to Prevent Costly Losses During Big Market Panics By Porter Stansberry

Today's essay is about something no one ever wants to talk about: The horrible, out-of-control feeling that overwhelms investors and leads them to make irrational financial decisions with terrible consequences. Panic.

For wise investors, it's not a question of if other folks are going to panic, it's a question of when. Today, I'm going to give you a far better understanding of what causes investors to panic.

Let me start with something I doubt you've thought about before: There are two kinds of panic that affect investors.

You're probably familiar with the first kind. You might have even felt it over the last few weeks. This kind of panic sets in when stocks fall sharply on huge volume, like they did on Friday, August 21, and again on Monday, August 24. An important secret lies beneath these moves. Once you understand this better, you'll never succumb to these feelings again.

The topics below deal with making smart decisions in the midst of severe financial losses – something that most people will never learn how to do. I'm going to tell you how I learned to deal with these pressures and these emotions.

These are the ideas and strategies that worked for me, and I know they've been helpful for many of the people I've trained and worked with over the years. There's certainly no guarantee these ideas will work for you… and, in fact, I suspect that few of our subscribers will even agree with me about what I've written below.

Most people believe that the panic we saw in the market last month (the huge volume, the big moves down in stock prices) was the result of emotions. Most people call this a "panicked" selloff. I don't believe it.

Selloffs like that aren't caused by emotional behavior. Yes, of course, some people are panicked. Yes, some of those folks are selling. But the huge volume and the big price changes we saw last month only happen when lots of investors realize they've made a big mistake.

As the realization dawns on them, their reaction is that kind of determined selling… no matter what the price. This reflects an important change in the market's basic understanding of the underlying fundamentals. Something "broke" last month.

One (or more) of the major "pegs" of this bull market was revealed to be false. And the response by the market participants was urgent and emphatic. This wasn't merely emotional selling. This was the realization that huge amounts of capital have been misallocated.

This kind of emphatic selling is the natural result of a lot of bad decisions made in the months and years before the actual panic. The biggest excesses in the most recent credit bubble were in oil and gas exploration, subprime auto finance, and student loans. That's why you saw such big moves down in General Motors (-8%) and Santander Consumer Finance (-4%). And that's why in my Investment Advisory portfolio, we were stopped out (with some losses and some gains) of most of our remaining oil-related investments.

The key to avoiding costly losses during big market panics is simply to avoid making mistakes along the way. I've been warning about the coming correction in the oil industry and the reckless lending that was propelling the boom since 2012. I've been warning about the coming train wreck in subprime auto lending for a year and a half.

Just a week before this market correction, I told my readers exactly why it was inevitable and would happen soon. So we weren't surprised. And our portfolio didn't suffer much.

No, we weren't able to avoid all of the losses the market endured last month. We don't have a crystal ball. But just looking at the most recent recommendations on these stocks, the average gain from the four energy-related companies we were forced to sell was 5.3%.

We avoided taking any big losses last month because we didn't make many mistakes earlier. We took profits along the way. We were diversified. And we only bought shares when they were available at good prices. As a result, we only lost one non-oil-related stock to a trailing stop.

When other investors "panicked," we didn't have to do much of anything, because we had made good decisions in the years and months leading to the correction.

Now ask yourself, and be honest: Were you diversified enough going into this correction? Did you buy "boring" insurance stocks? Did you begin to raise some cash? Did you buy any precious-metals stocks to hedge your portfolio? Did you hold off on buying new investments and wait for this correction?

If you did these things – even just a few of them – then the correction wasn't something to be feared at all. It was something to be celebrated.

Last month, capital fled from the weak and the foolish and returned to the wise and the patient. The media, which cater to the lowest common denominator in our society, call this a "crisis." We call it a victory. These "panics" are one of the main reasons why capitalism works. The virtuous are rewarded, while the foolish and greedy get "taxed."

Now… let's talk about the second kind of panic, the kind that few people ever talk about. This is the kind of panic that freezes investors. It leaves them unable to make decisions – often with horrible consequences.

This type of panic is poorly understood. It's almost never written about. No one discusses it. But it's far more dangerous to you than the first kind of investor panic. There's a secret to understanding this type of fear, too. Once you know where it comes from, it won't ever bother you again.

I've received hundreds of letters that all say the same thing: "Porter, after the bear market of 2002… or after the financial crisis of 2008… or after the correction of 2011… I was too afraid to buy stocks. I was just frozen. I couldn't pull the trigger…"

I don't think this correction is finished. The real carnage hasn't even begun. This bull market was built on a few key narratives: That China's growth would propel resource prices forever… that Europe was fixed and would begin to rebound… and that the U.S. economic rebound would create a huge new wave of consumer demand. These things haven't come to pass, and the market is beginning to realize it.

The big problem, which will take a long time to fix, is credit. Credit-default swaps have begun to soar in price (revealing credit distress) in big, important businesses. Auto makers General Motors and Ford, energy producer Chesapeake Energy, and resource giant Freeport-McMoRan, for example, have all seen big spikes in the cost of credit protection associated with their bonds.

Credit-default swaps are how banks, insurance companies, and major hedge funds protect themselves from credit losses. These moves are indicative of a much tougher credit environment moving forward.

These facts are going to scare a lot of investors. Some of them will panic. They will sell everything. They will go to cash. They will miss once-in-a-decade opportunities to buy high-quality businesses – the kind of investments that can multiply your capital by 10 or 50 times in a decade.

That's why I see the idea that the market is probably going lower as good news. I'm building a big list of securities that I'd like to buy. I know that I can't time the bottom – all I can hope to do is to buy some world-class businesses at fair prices. I will only have these opportunities if other investors "panic" and refuse to buy stocks because they're afraid of what went wrong during the last cycle.

You'll find a sample list below. Keep in mind, these aren't necessarily "buys" at today's prices. And these names may or may not ever end up in my Investment Advisory recommended portfolio. We have a lot more work to do researching these names.

Here's my theory about panics. The first kind of panic, like we saw last month, is caused when investors "wise up" and realize they've made some big mistakes. But the second kind of panic, when investors "freeze" and refuse to invest, happens because of ignorance. It's the second kind that's more likely to prevent you from achieving your financial goals.

Don't panic. Just invest wisely.

Source: www.dailywealth.com

[winston]

An Easy Strategy to Survive and Prosper in These Markets by Alexander Green

The recent volatility in stocks has many market participants perplexed.

Some feel this is the beginning of a new bear market. Others believe it is just a normal and much-needed correction in an ongoing bull market.

But it would be a big mistake to bet heavily either way.

No one ever knows what the market will do next. So the wisest course of action is to always hedge your bets... and follow our Escape Hatch Strategy.

The Oxford Club operates from the real-world premise that economic growth, interest rates, Fed policy, commodity prices, currency values and short-term market movements cannot be accurately and consistently forecasted.

Acknowledging this - as all the great investors have, from Benjamin Graham to Peter Lynch to Warren Buffett - is the foundation of intelligent investing.

The key is not to react emotionally to market movements but to prepare for them in advance.

The first element of our Escape Hatch Strategy is your Asset Allocation. How you divide your money up among stocks, bonds, Treasury inflation-protected securities and other asset classes is your single most important investment decision, responsible for as much as 90% of your long-term total return. (The balance is determined by your security selection, investment costs and taxes.)

If you have too much invested in stocks, you won't be able to withstand the inevitable downturns. If you have too little, you won't reach your long-term financial goals.

That's why The Oxford Club recommends that you have 60% of your portfolio in equities.

The second element of our Escape Hatch Strategy is position-sizing. You should never invest more than 4% of your stock portfolio in a single stock. (It may grow to be much more than 4% of your portfolio eventually. But don't start with more than 4% initially.) This ensures that you never have too much in any single security.

The third part is our trailing stop strategy. This gives you unlimited upside potential with strictly limited downside risk. We never hold on to a stock that has fallen 25% from its high or our original entry price. It's our ironclad sell discipline, protecting both our principal and our profits.

As you can see, we have strict criteria for what and how much we buy - and strict criteria for when we sell. Anyone without a well-defined buy and sell discipline is simply flying by the seat of their pants. And that rarely leads to outperformance.

The Escape Hatch Strategy gives you plenty of upside potential. (After all, The Hulbert Financial Digest has ranked our Communiqué among the handful of best-performing investment letters in the nation for the last 14 years.) But here's how it also keeps you safe...

When you have 60% of your portfolio in stocks, you take advantage of the superior long-term returns available in equities. But when the inevitable correction or bear market shows up - as they always do eventually - you have far less volatility (and fewer sleepless nights) than someone fully invested in stocks.

But there are other benefits. Here's what happens when you combine our trailing stops with our 4% position-sizing strategy. Even if you take the maximum loss (25%) on the maximum position size (4%), your stock portfolio is worth only 1% less, since 25% of 4% is 1%.

Of course, by using our asset allocation strategy, you have only 60% of your investment capital in stocks. So your true maximum loss amounts to just six-tenths of 1% of your portfolio's total value (since 60% of 1% is 0.6%).

Bear in mind, this is your worst-case scenario. The maximum loss on the maximum position size using our maximum recommended stock allocation would result in your portfolio being worth 0.6% less.

In a serious bear market or correction, of course, it is likely that you will stop out of several stocks in a short period of time. So the losses may mount. You will be taking profits too, however. For example, we recently stopped out of Union Pacific (NYSE: UNP) in our Oxford Trading Portfolio with a 168% gain. That would offset a number of losses of 25% or less.

The real test of our Escape Hatch Strategy was the financial crisis of 2008 to 2009. That bear market started in earnest in the summer of 2008. By October, we had stopped out of all 44 positions in our Oxford Trading Portfolio.

We took profits in many of those positions and losses in others. But the average return was 28% on those 44 recommendations. Not bad for a year when the S&P 500 declined 36%, one of the worst years since the Great Depression.

In fact, the market didn't stop falling until the second week of March 2009. The drop between October 2008 and the bottom in 2009 was over 50%. Yet by using our Escape Hatch Strategy, we dodged it entirely.

I recently created a special Escape Hatch Portfolio, made up of investments designed to prosper in good times and bad. It contains food companies, drug companies, healthcare companies, medical technology firms, diversified holding companies and bonds that are immune to future interest-rate tightening.

Available exclusively to my Oxford Communiqué subscribers, the Escape Hatch Portfolio offers both a high margin of safety and excellent upside potential - and is designed to be used in conjunction with our asset allocation model, position-sizing strategy and trailing stops.

Our Escape Hatch Portfolio is a vastly superior alternative to running to the temporary safety of cash and thereby missing the recovery when it comes. As it inevitably will.

In the meantime, you can relax and let the latest craziness in the market play out. After all, you don't have to worry.

You're using an Escape Hatch Strategy.

Source: Oxford Club

[winston]

How To Guard Against Big Losses

http://www.forbes.com/sites/marcgerstei ... ing-Digest

[winston]

The 4 Best ETFs to Hunker Down With for the Winter

Things are getting a bit dicey in the markets, but you can protect your portfolio with these ETFs

By Aaron Levitt

Source: Investor Place

http://investorplace.com/2015/09/best-e ... gxo1NIirIU

[winston]

Three Steps to Protect Your Portfolio From the Next Bear Market By Alex Green

Three Essential Steps

Given the mixed outlook, what should you do with your portfolio now? Start with these three essential steps:

1. Check your asset allocation. The roaring bull market of the last six and a half years has almost certainly increased – and perhaps more than doubled – your exposure to equities. If it’s now larger than you’re comfortable with, pare back to the point at which you’ll be able to sleep at night.

How much in stocks is enough (or too much)? Investment great Benjamin Graham used to say that no one should have more than 80% of their portfolio in stocks – or less than 20%. Look at your age, time horizon, and risk tolerance, and adjust accordingly.

2. Move those trailing stops. Make sure they are no more than 25% below your holdings’ recent highs. And if you’re using “mental stops” – no actual stop orders entered – be sure to maintain your sell discipline when your stocks trade through your predetermined price.

3. Adopt a late-stage bull market strategy. That doesn’t mean move to cash. (This bull market could last five more weeks, five more months, or five more years.)

History shows that as a bull market ages, the safest and best-performing stocks tend to be recession-resistant, mega-cap value stocks, preferably ones with growing dividends. (Those dividends both support your shares and provide income during the bad times.)

All this government meddling with the market makes this a challenging time for investors. We can only wait and see what policymakers dream up next — whether it’s higher rates or QE4, or something entirely new.

Investment legend John Templeton used to point out that no matter how strange things look, economic and market cycles are all essentially the same.

He famously noted that “this time is different” is the most expensive phrase in the annals of investing. That statement is generally true.

But check your history. When was the last time the national debt was bigger than our GDP and the Fed held rates at zero for nearly seven years?

This time really is different. Govern your portfolio accordingly.

Source: Oxford Club

[winston]

The Missing Piece By Adam O’Dell

Last week I talked about the real reason most investors get slaughtered in the stock market.

All complexities aside, investors simply don’t have the psychological strength to execute the “hold” portion of “buy-and-hold.”

It’s easy to hold stocks when they’re going up (as they do a majority of the time). It’s even easy to hold stocks through a routine 5% or 10% dip.

But when stocks are down 50%... 60%... 70%... even 80%... most investors cave to that gnawing feeling in our gut. It screams: “Enough is enough! Get me outta here! Give me my money back!”

As well-intentioned investors, we listen to our own fearful pleas. Essentially, we hit the panic button and run for cover. And cruelly, we usually reach our rock-bottom breaking point at just the worst possible moment – only after stocks have already fallen 50% or more, and just before they begin their long road to recovery.

As I said, it’s cruel!

But there IS a solution to this conundrum.

After all, buy-and-hold isn’t without merit. It’s just missing an important piece of the puzzle: capital preservation.

Think about Warren Buffet’s two rules for investing…
Rule #1: Never lose money.
Rule #2: Never forget rule #1.

Now, I take issue with Warren Buffett’s “never lose money” mantra, but only on a technicality. I think it’s impossible to invest in financial markets and, literally, “never lose money.” No one has a 100% perfect track record, not even Warren Buffett.

So I prefer to say: “Never lose all of your money.”

That’s what capital preservation is all about!

No matter what, you should act in a way that ensures you keep at least some of your money for tomorrow. No matter what, make certain you operate in a way that allows you to live to fight another day.

It’s as simple as that. Yet, many investors fail to fully embrace this – both in philosophy and practice. And the buy-and-hold doctrine completely fails investors when it comes to capital preservation.

I’m sorry… but telling me to just “buy and hold (and hope)”… telling me everything will be fine, as long as I close my eyes and ignore my account statements for 30 years or more… that just doesn’t cut it for me!

Simply put: buy-and-hold needs a safety valve.

The safety valve is all about capital preservation. It ensures we don’t lose all of our money. It ensures we aren’t faced with the tough decision to sell our portfolios when they’re down 80%, else hold on and hope a bit longer.

And the good news is there’s a simple way to do just that – to add a capital preservation component to buy-and-hold. Here’s one way to do it:

Rule #1: Buy-and-hold, but only if the stock market is above its 200-day average.
Rule #2: Sell stocks (move to cash), if the stock market is below its 200-day average.

That’s it.

It’s simple advice. So simple that I suspect a majority of investors will ignore it – either because it sounds too simple or because it’s boring.

But if you’re serious, truly serious, about capturing the long-run returns that stocks provide and preserving capital, then consider this.

If you had bought $100,000 worth of shares of the S&P 500 in 1965 and held through today, you could have earned a profit of nearly $2.2 million.

Notice I say “could have.”

Buy-and-hold suffered a 56% drawdown during the 2008 financial crisis. So earning that $2.2 million return would have required unshakable discipline to the buy-and-hold doctrine, something I’ve seen very few investors able to do.

I was working as a financial advisor at the time, so I can personally attest to the fact that most investors panicked and sold their stock holdings during this gut-wrenching period.

That’s why investors almost never earn the full buy-and-hold return even if, in theory, it’s available to them. Recall that while stocks have produced annual gains of 7.8% over the last 20 years… investors have earned just 2.1%.

And that’s why a capital preservation strategy is far superior. Anyone who had followed the two simple rules of capital preservation investing could have done a lot better in 2008. Get this…

The capital preservation strategy recommended moving to cash on December 28, 2007. And it recommended remaining in cash for the entire year of 2008!

So while the traditional buy-and-hold strategy suffered a maximum drawdown of 56% through the Great Financial Crisis, the capital preservation strategy was down just 13%, before moving to the safety of cash for the entire year.

Clearly, a capital preservation strategy saved hides in 2008. But it’s also saved investors from a number of wealth-destroying periods over the last 50 years.

Specifically, the capital preservation strategy earned a total return of $2,118,000 – just $72,000, or 3%, less than buy-and-hold – but suffered a maximum drawdown that was only half as severe as buy-and-hold’s!

Take a look…

See larger image

Listen… I’ll take 97% of the market’s total return in exchange for a 50% risk reduction any day of the week – and you should too!

That’s what capital preservation is all about!

It’s about finding a way to participate in the stock market’s bullish bias… but only when it’s relatively safe to do so. And then, when the risks are too high, it’s about sitting safely on the sidelines, in cash.

I call this strategy “buy-and-hold-and-preserve.” And I’m convinced that it’s a far safer option than buy-and-hold.


Source: Dent Research

[winston]

How to prepare for a bear market

by Porter Stansberry

Source: The Stansberry Digest

http://thecrux.com/porter-stansberry-ho ... ar-market/

[winston]

My Best Advice for Preparing for a Bear Market by Porter Stansberry

If you're nervous about stocks and bonds like we are, sell some of your investments.

Sell enough so that you can sleep well at night. Sell enough so that you will have plenty of cash if a crash occurs – enough to buy good investments at great prices.

But don't feel like you have to sell everything.

Don't pretend that you can know exactly when a bear market will begin.

Likewise, when you're hedging your portfolio, try adding one or two shorts at a time. If they work, you can add more. If not, you know we're still too early.

Remember: Most of the time, stocks go up. That's a hard trend to fight.

source: Growth Stock Wire

[winston]

Make sure you don't buy too much of a risky stock and helps buy more of the high-quality, safe stocks.

http://thecrux.com/porter-stansberry-th ... t-finance/