A big correction is coming...
It's not a question of "if" but "when."
Over the past two years, stocks are up 45%. We haven't seen a drawdown of 10% that whole time. But that doesn't mean it's never going to happen again.
It will... and worse. And today, I'm going to show you how to protect yourself...
Last month, I reminded you that the "
big picture is still bullish." And it is. Take a look... Last week, the S&P 500 hit a new all-time high.
This bull market continues to power higher. And like I said, we're going to stick with our bullish bets for as long as possible.
But even strong bull markets regularly pull back 10% or more. And of course, no bull market lasts forever. To avoid catastrophe, you have to prepare yourself and your portfolio for anything.
I showed you exactly how to do that a few months ago... The idea behind this
catastrophe-prevention plan is simple:
| Often when one area of the market "zigs," others will "zag." A good mix will reduce the ups and downs in your portfolio... and protect you from catastrophe. |
|
In other words, you don't want to have all of your wealth tied up in stocks. You want to spread it around among various assets – like real estate, cash, fixed income, and precious metals. When stocks drop, your other positions will help offset your losses.
Another way to offset your stock market losses is by "short selling."
To sell a stock short, you borrow shares, sell them at the current price, and buy them back later... hopefully for a lower price. You pocket the difference. I made a short video that explains the basics.
You can watch it right here. But let me briefly walk you through the hypothetical example I used:
Let's say you expect Acme Cell Phone's earnings will decline... and so will its share price. You want to profit from that decline.
So you go to your broker and borrow 200 shares of Acme (which trades at $50 a share). You then sell those shares for total proceeds of $10,000.
Six months later, you're proven right. Consumers are rejecting Acme's cell phones. Acme's sales plummet... and the stock drops to $20 per share.
Now you can buy the shares back for $20 each and have your broker return them to the institution that let you borrow them. You only have to spend $4,000 to buy the 200 shares back, so you pocket the $6,000 difference, minus commission.
The thing is, when the "big picture" is bullish, it's difficult to make money shorting stocks. My publisher Porter Stansberry has done more work to educate readers about shorting – and provide short recommendations – than anyone else at Stansberry & Associates. Here's his take:
As you know, we have been wary of the market's general direction since June 2013... so we've been continually adding short-sale positions to our portfolio. The goal was not to hit every one out of the park. And in fact, several of these short positions fared poorly as the market continued its rise.
It's hard to short in a bull market.
But the point of these positions was to be "downside insurance" – hedges against the downturn we believe is coming. When the bear market rolls in and knocks down stock prices indiscriminately... the gains we make on our short positions will offset losses we would take on the stocks we hold. |
|
As Porter explains, the point of shorting stocks is not to generate a big trading profit. It's to "hedge" your portfolio... to help prevent catastrophe. You actually hope to
lose a little money on most of your hedges. That means the rest of your portfolio is likely doing well.
But a long-stock portfolio won't do well forever. The bull market will eventually suffer a big correction... And it will eventually end. You should have your catastrophe-prevention plan in place now. And it should include a short sale or two.