In the past couple of weeks, we’ve been seeing record highs in the markets nearly every day.
However, we saw a pretty scary headline earlier this week about the Nasdaq Composite Index.
On Monday, Bloomberg reported that nearly half of the stocks in the tech-centric Nasdaq have declined 20% from their highs of the past 12 months – putting them in “bear territory.”
Now this decline is mostly in small caps, which I don’t cover in Strategic Tech Investor. However, Nasdaq small caps are not the only place we’re seeing jitters in the overall market.
Even with interest rates so low and the economy steadily improving, many nervous investors – worried about a correction – are selling off.
So, today I want to share with you three strategies designed to turn market declines to your financial advantage.
With them, you’ll leave the nervous sellers in the dust…
Reduce Risk… Increase Profits
This week’s negative headlines remind me of a conversation we had earlier this year.
On April 11, I noted that some pundits were talking of a tech crash in the making. My note cut to the chase and said, “It’s not time to panic… It’s time to buy.”
Since then, the Nasdaq has posted 15.16% gains. That’s nearly double the Dow’s 7.7% profits and significantly higher than the S&P 500’s 10.85% gains.
I’m not pointing this out to brag (well, maybe a little) but to show you that when I say the road to wealth is paved with tech, I’m using empirical data to make that statement.
Sure, there are periods when tech goes out of favor. But that is true for every single sector of the U.S. economy, from finance to consumer goods to construction.
But over the long haul, high tech presents investors with the greatest number of opportunities to beat the market. After all, tech is where most new opportunities come from in the first place.
So, I haven’t lost even a small amount of confidence about tech’s wealth-building abilities. But it does pay to be prepared for market corrections.
With that in mind, here are three risk-control strategies that will help you build more wealth.
Risk Reduction Profits Strategy No. 1: Focus on Quality
Before revealing my first risk-reduction strategy, let me welcome any new readers with us this week.
When I launched Strategic Tech Investor in the spring of 2013, I provided details of my five-part system for creating tech wealth. And I encourage the newcomers among us to peruse those first few columns after reading today’s report.
I designed these five rules to find you high-quality companies. These are companies’ whose stocks have the baked-in ability to double and triple your money.
And all these companies have several things in common. Great leadership is imperative. You’re looking for a CEO with a proven track record of making money for shareholders.
We also want to find well-run companies. These firms have a track record of earnings growth and excellent operating margins, preferably higher than 20%.
At the same time, the companies we choose are leaders in fields that will grow for years to come, such as cloud computing, Big Data and the mobile revolution.
Focusing on quality greatly stacks the deck in your favor during good times and bad. In fact, tough markets often bring what I call “a flight to quality” – stocks so good that investors gladly buy on the dip.
Risk Reduction Profits Strategy No. 2: Work Your Shopping List
People grouse all the time about not being able to find good stocks. I think that’s lack of discipline, however, not a lack of good stocks.
In fact, you don’t even have to be an active investor to come across more good stocks than you can buy at any one point in time.
This is where being a disciplined and focused investor comes in handy. You should be looking for proven winners, not just buying cheap stocks and hoping they go up.
You are going to find intriguing companies that you just can’t act on for any number of reasons. Never throw an idea away. Just put those stocks on your “shopping list” for a day when you are ready to pounce.
Trust me, that day will come. Maybe you want to close out a big winner, or perhaps you need to cut a couple of weak performers from the portfolio – or we could always get a market correction and you get stopped out of a few positions.
That’s why it pays to have a list of stocks you’d really like to buy when the time is right, such as right now when many quality stocks are trading at a discount.
Then there’s “the winners that got away.” Those are the market leaders you heard about too late to get in on but you’d love to buy on a correction.
That’s one of the reasons why we discuss so many stocks here at Strategic Tech Investor. I want you to have the world’s best tech investing shopping list.
Risk Reduction Profits Strategy No. 3: Make Split Entries
This is a process I use all the time. It’s a great way to move into a potential big winner in a bull market and make sure you don’t overpay. Plus, you also pick up extra profits.
For example, let’s say XYZ Mobile Corp. has been on your shopping list. It was trading at $33 but has since retreated to $25, a price your research reveals to be a great bargain.
You enter this position in a series of tranches. This could be as few as two or as many as four. Let’s keep it simple and look at a two-tiered entry. In this case, we buy half at market at a price of $25 a share but with no stop loss.
As soon the market order fills, you then enter what’s called a “lowball limit order.” What this means is that you tell your broker that you want to buy a second tranche of XYZ Mobile at a much lower price. A 20% discount is a good principle for filling the second half.
You would then enter a “limit order” for the second round of XYZ at a price of $20 or lower. If the stock falls to that price, your order automatically fills, and you now have an average purchase price of $22.50.
Once the stock resumes its climb, you have baked in extra profits. For instance, when XYZ hits $30 a share, your cumulative gains are now better than 33%. ($30 minus $22.50 divided by $22.50 equals 33.3%.)
Had you simply bought the stock and held, your returns would have been 20%. Split entries are a powerful way to ride out market retreats and make extra money in the long run.
Now then, whenever I discuss portfolio management, I invariably get a question or two about complex hedging strategies. That’s really beyond the scope of what we do here at Strategic Tech Investor.
Fact is, Wall Street has an army of experts who run sophisticated hedging strategies on supercomputers all day long. Individual investors just can’t do anything remotely that complicated.
However, you can “hire” these pros at a fraction of what Wall Street pays them. You do this by investing in “inverse” exchange-traded funds (ETFs). As the term implies, inverse ETFs often short popular benchmarks.
For instance, the PowerShares QQQ (NasdaqGM: QQQ) is an ETF that serves as a tracking stock for the Nasdaq 100. There is also an inverse ETF that basically shorts QQQ, giving you insurance against tech declines.
It’s the ProShares Short QQQ (NYSE: PSQ). The good thing about this type of inverse ETF is that it pays you when the Nasdaq drops roughly on a 1-to-1 basis. For every percentage point the index goes down, PSQ rises by that amount.
However, this is really a very short term play you must use with caution. Holding an inverse ETF like PSQ for more than a few days could end up costing you money.
After all, when the Nasdaq rallies again, PSQ goes down.
So, you now have three long-term strategies and a short-term “bonus play” you can use to keep your portfolio moving forward during any market retreats that may come our way.
And if you put these tools to good use, you’ll find you have the skills to profit when other investors panic.
- Bloomberg: Record S&P 500 Masks 47% of Nasdaq Mired in Bear Market.
- Strategic Tech Investor: It’s Not Time to Panic… It’s Time to Buy.
- Strategic Tech Investor: The Road to Wealth is Paved by Tech.
- Strategic Tech Investor: The First Rule for Spotting a High-Tech Winner.
- Strategic Tech Investor: The Second Rule for Grabbing Massive Tech Profits.
- Strategic Tech Investor: The Third Key to Triple-Digit Tech Profits.