Hard-core sailors and veteran tech investors have one important quality in common.
They understand how to navigate choppy conditions.
That shared insight is something I know about firsthand. You see, I moved to the Bay Area nearly 30 years ago to be closer to the tech-stock mecca of Silicon Valley and to race sail boats.
In recent years, I even found a way to combine those two loves: Though I eventually traced the rigors of racing for the simple joys of cruising, I now manage to go sailing on a regular basis with a couple of tech-investing pros – including one who’s a daily denizen of “the Valley."
During one of our most recent outings – after we traded stories about battling whipping winds and four-foot-and-higher waves – I found that my sailing compatriots agreed with my belief that tech stocks are headed for some choppy seas this summer.
But that doesn’t mean you should stay tied up at the dock.
Over the past several months I’ve told you how to build wealth.
Today I’m going to show you how to keep it …
Five Moves That Will Calm Your Nerves
Look, I can understand why investors – and even consumers, for that matter – are feeling a bit rattled right now.
First, you have before you a 7.6% unemployment rate – which to most folks sees outlandishly high this late into an economic “recovery." Then you have the threat of an increase in interest rates – when we all know that cheap money and low rates have been two of the biggest catalysts behind this bull market.
Finally, you have the fact that the NASDAQ Composite Index reached an 11-year high of 3,502 on May 21, which likely has many investors worried that this tech-centric index was trading at stratospheric levels – meaning any bad news could cause it to teeter.
As if to confirm those worries, in the two weeks that followed, the NASDAQ had two down sessions for every up day it posted. It closed Thursday at 3,445.37 – down about 1.6% from its peak.
Investors who “drill down" and really study the markets were likely even more fearful. On Monday, the Standard & Poor’s 500 Index closed basically unchanged from the previous trading session. But the very next day, it was off roughly 1%, a somewhat docile number that masked the underlying turmoil. When the closing bell rang, only 18% of stocks showed gains – while a full 77% were losers.
But don’t worry, I approach tech investing the way I skipper a sailboat. For instance:
- I plot my route (to my destination) before I start my journey.
- I account for every hazard that I can – and have safety-focused contingencies.
- And I don’t take unnecessary risks.
A lot of folks are going to ask: “If you know there are risks, why leave the dock at all?"
That’s a good question. And I had some very good answers.
For one thing, while you may suspect certain risks are present, and may even fear them, you never really know when they’ll show themselves.
Sometimes the things you most fear never happen. And when you let fear paralyze you, some pretty terrible things can result. In sailing, if you stay tied up at the dock, you never reach your destination.
The same is true with investing. Here at Strategic Tech Investor, our goal is to help you avoid the plight of so many Americans, who have zero net worth.
But if you stay out of the market, you can’t reach that destination, either.
In fact, if you sit on the dock and stare at your boat because you’re worried about the choppy seas, the damage your finances can suffer is irreversible.
If you invested $10,000 in stocks at the start of 1980, and stayed in the market, your “nest egg" would’ve grown to $332,500 at the end of last year. If you missed just the five best days of the market, that nest egg would’ve grown to only $215,000. Miss the best 30 days, and you’d have only $63,500. You get the idea.
Our message here is that you can earn returns that are well-above average by investing in tech stocks – the “right" tech stocks, to be sure. And we’re here to help you find those “right" tech stocks.
But the same “missing-the-best-days" precept holds true.
In the past I’ve told you about the rules in my five-part strategy for building wealth through tech stocks. Now I want to share five tips that can help you keep that wealth.
The goals here are to ride out the choppiness and not risk missing those “best days."
To manage your risk and achieve these additional goals, you should look to:
1. Make smaller entries: This is a powerful way to reduce risk from a correction but still catch a good part of any rally. Let’s say you have $100,000 in the market and in normal times limit any position to 5% of your capital. If your risk worries are rising, you might cut that “position-sizing" figure in half to 2.5%, or $2,500.
2. When in doubt, start with “test" shares: In the above example you might make an initial entry of, say, $500 – just to make sure you’ve timed your entry correctly, which is hard to do in volatile markets. You can then add to your position as the stock advances. (If you’ve ever read the investment classic “Reminiscences of a Stock Operator," which is a fictionalized account of real-life trader Jesse Livermore, you’ll find that was a tactic this big-time trader greatly favored.)
3. Use stop-losses: There are two ways to employ these essential portfolio tools. The first is a stop-loss that protects against losses getting too deep. I suggest a stop loss of no more than 20%. The second method is a “trailing stop" to protect gains. This is one that moves up as the price of the stock advances. Use the same 20% figure in this manner. Let’s say you bought a stock at $15 that’s gone up by two-thirds to $25. Put in a trailing stop of $20. That way you get out with profits of 33% no matter what happens.
4. Take “Free Trades:" This is a great way to take gains off the table and still go along for the ride. It works like this: When you are up 100% on a stock, sell half. That way you recoup your entire investment and are “playing on the house’s money," as we like to say. Then use a trailing stop to protect profits on the remaining half.
5. Stay in the market: If you want to reduce your exposure, that’s fine but don’t cash out altogether. I know a “very savvy trader" who got scared last November and sold all his stocks. Since then, the market has rallied some 21%. He left a lot of money on the table. Had he cut his holdings in half, he’d still be sitting on overall gains of 10%. You can always shift some of your capital into ETFs. On Tuesday, I showed you how the iShares NASDAQ Biotechnology Index (NASDAQ: IBB) can greatly reduce your risk – while still giving you the chance to double your money.
In the meantime, I actually do see a lot of positive signs for the overall market and for tech in particular.
After years of declines, new money is flowing back into the stock market. The research firm TribTabs says that, as of the end of April, investors have put roughly $60 billion in new cash into stocks so far this year.
That’s already more than any full year since 2004. In fact, the TribTabs stats show a net outflow of $178 billion for the previous two years combined.
So, the new cash is welcome news. After all, bull markets need fresh cash to keep moving up. For the long term, this is an excellent trend.
Key sections of tech continue to do very well. Mobile devices are flying off the shelves and firms involved in Big Data and the Cloud are raking in the cash.
On the strength of those trends, semiconductors stocks have staged a solid rally this year. The Market Vectors Semiconductor ETF (NYSE: SMH), a good proxy for the sector, is up nearly 18% since January.
The biotech sector continues to show strength. For instance, IBB, the biotech ETF I mentioned earlier, is up 26.5% year to date, double the market’s nearly 13% return.
And remember, one of our my main missions here at Strategic Tech Investor is to help you employ investing rules and tools needed to both make money and protect your portfolio.
I’m confident that if you employ the tips I’ve shared with you today, you’ll get through any challenging markets with profits intact.
Editor’s Note: As my “Tech Stock Treasure Map" column from last week underscores, I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you.