Do you hear that?
The beat is getting louder and louder.
It’s war drums… hammering out a tune familiar to oh-so-many presidential incumbents.
As you know, things are heating up in the Middle East once again.
For investors like us, it starts 2020 off with one heck of a wild card.
We’re on the record saying 2019 would end with the market at record highs and that the good times will continue through the first half of 2020.
Our ideas have not changed.
But as we’ve learned over the years, we don’t have a plan… unless we have a backup plan.
We’ll share a quick story and then show you how it relates to making money – no matter what happens – in 2020.
We flew a lot when we lived in Alaska. At least once or twice a week, we found ourselves climbing into the right-hand seat of an old de Havilland Beaver – a float plane built in the late 1950s.
If you’ve flown, you know that’s not the good seat. The pilot tends to fly from the left. We merely held the map and pointed out obstacles in the fog.
But one day, Alaska’s notorious weather didn’t show up. There was no rain… not even a cloud. We decided to take a trip across the mountains – a trip neither of us had ever made.
We pushed the throttles forward, skipped across the water and caught the wind under the wings. Up we soared.
It was gorgeous as the oil-slick-smooth water turned into land and formed the purely vertical fjords Southeast Alaska is known for.
Eventually there was snow under the plane, and we enjoyed the expected light bounces as we tipped the top of the mountains and caught the air currents that rush up the other side on a warm summer day.
Most of the air currents we found were surging up. It made flying fun.
But as we entered a rocky, bowl-like formation, we found ourselves stubbornly stuck in a slug of air sliding down the mountain. It was like an invisible avalanche… and we were getting pummeled by it.
No matter how much fuel we poured on or how hard the pilot pulled back, the altimeter kept creeping lower and that once-beautiful vertical mountain face suddenly looked quite hard and unforgiving.
We were in trouble.
At least we could have been.
Fortunately, our pilot had spent many years in this sort of climate. He knew that where air goes up… air must go down to fill the gap.
He gently looked out my window, cranked the yoke over a few degrees and turned us around. We got where we were headed, but we had to corkscrew the plane up and out of the valley before we could get there.
If the pilot hadn’t prepared for such a move – had he instead flown down the center of the valley and not to its side – we wouldn’t have had the room or altitude to turn around.
He had a backup plan… and it didn’t involve survival gear or us calling for a helicopter to pick up the pieces of our plane (we’ve seen that, too).
Markets Go Up… and Down
Again, what’s happening in Iraq these days doesn’t appear to have the teeth to be able knock down one of the strongest bull markets in history. The stock market rides higher on earnings… and, if anything, skirmishes like this one only add to earnings (defense industry lobbyists certainly worked late over the weekend).
But what would you do if things took a turn south? What if the markets get caught in a sudden downdraft?
Most folks squint and take the blow to the gut.
They’d gripe. They’d miss their money. And they likely wouldn’t invest more in the future.
We’ve seen it over and over.
But – as is our mission – we beg you to think differently.
Prepare your backup plan now while the weather is nice.
We recommend three things. They’re simple… and short selling is not one of them.
If you’re a subscriber to any of Manward’s financial products, you likely know of the first one. Trailing stops are an ideal way to maximize your upside while protecting your downside.
Designed to move higher as your profits move higher, this exit strategy automatically sells a stock position once the price moves a set distance from its high. Typically, we use a 25% trailing stop.
That means if a stock hits $100, we’d sell if it slid back to $75. And if it hits $150, we’d sell when it hits $112.50.
The value of such a strategy is obvious.
But it can be confusing… so click here to watch a video where we run viewers through the mechanics of trailing stops and how to enter them in various broker platforms.
Next up… a strategy that needlessly scares far too many folks.
Option investing gets a bad rap. Let us tell you this… If options were so speculative and so dangerous, why would billions of dollars’ worth of contracts trade hands each day among some of the world’s top traders?
Clearly, they have immense value.
The value comes from hedging positions. If we own $10,000 worth of stock… why not spend a few hundred bucks to protect our downside?
That’s what options do.
We can’t get into it all in one essay, but do this: Take 10 minutes each day for the next two weeks to study the options market. There’s no need to make a trade – just expand your Know-How a bit.
That way when it comes time to make a trade, you’ll be not only more knowledgeable but also eager to put a new skill to work.
Finally – and they aren’t nearly as powerful as options – exchange-traded funds (ETFs) are a very popular way to play a change in the market’s direction.
They can be very broad and aim at the entire market, playing it up or down. Or they can be very specific, investing in, say, only junior gold miners.
But here’s the thing… Too many folks treat ETFs like a long-term hedge. That’s dangerous.
We won’t go into the math, but just know that bearish ETFs don’t offer enough leverage to overcome their natural tendency to go down (it’s a matter of how the contracts are priced and rolled over each month).
That’s not a problem, as long as you’re aware of it.
It simply means that you must enter these trades when the market dictates the move. They are not a buy-and-hold sort of hedge.
Our point here is not to convince you the bears are in charge. They aren’t. We don’t want you to sell.
By all accounts, it’s still a bright, beautiful day on Wall Street.
But we don’t have a plan unless we have a backup plan.
Take time to think about what you’ll do if the mountain is growing in the windshield and you need to quickly change directions.
It could save a lot of pain… or worse.