A Better Way to Trade the Market's Ups and Downs

Early in my entrepreneurial career, I got involved in a small restaurant group.

The manager of the venture was a friend of mine, an ex-Marine JAG who wanted to get into business for himself. The plan was simple: open a small franchise restaurant in Minnesota. This was the 1990s, and we could choose from a whole range of franchises.

The manager narrowed it down to two choices and presented them to the group. We deferred to his judgment and let him pick which he thought would do better.

Our ownership in Cajun Joe's flopped. It was a bad choice. And even though he was under no obligation to do so, the business manager went back to work as a corporate lawyer and eventually paid back all his investors in full.

Of course, I wasn't relying on that. It was one investment I had made among many... And I only put up a small portion of my savings.

But had the manager taken the other option, a just-about-to-boom Subway sandwich shop, things would have been a lot different. Our little restaurant group would likely have been highly cash-flow-positive and expanded to multiple locations.

From my perspective, success or failure in this venture essentially came down to a coin flip. Not skill. No matter how much work you do, the role of chance can wash away years of planning.

The same thing can happen with your stock investments. Fortunately, you can prevent this kind of problem from ruining your nest egg – without passing up potentially lucrative opportunities...

Many investors and other wealth seekers take the view that they have to seek out one big bet and pile in. They figure if they search hard enough, they can find that sure-thing stock or strategy that will turn them from a wage-earner to a wealth spender.

Everybody wants to be the bold investor who shorted the housing market or the dot-com boom at exactly the right time.

But for every investor who pulled those tricks off, you will find hundreds who went bankrupt.

Fortunately, there's a better way to play the market's ups and downs.

Don't try to time them with an "all or nothing" decision. Instead, simply tilt your allocations. It's that easy.

Don't ever decide that it's time to sell all your stocks... or to load every penny you have into them.

You have many more possibilities for how much risk you want to allocate between stocks, bonds, cash, and other investments.

For example, do you remember the January 2016 crash?

At the time, China's stock market had dropped and anything with risk attached – like stocks and high-yield bonds – came tumbling down. One Wall Street analyst published a note that it was time to "sell everything." I took him to task in one of my newsletters that month...

There's a reason you don't often see bold pronouncements like this from serious research shops... It's terrible advice.

Not a single coherent investment strategy relies on selling all of your positions based on a prediction of a market crash. No successful hedge fund, portfolio manager, pension fund, or private wealth manager operates on such a nonsensical scheme.

At times, you may increase your allocation to cash and defensive plays. You may add some short positions.

How would you feel today if you sold everything in 2016 at the January bottom... and then watched the market rally nearly 50% higher?

Don't time. Tilt.

The best way to minimize losses and stress in most market downturns is through asset allocation, diversification, and stop losses... not changing your entire portfolio based on what might happen in the next month.

We suggest that investors look at their overall portfolio allocations today...

For example, you should absolutely have a properly sized bet on the "Melt Up." And you should also have the right amount of cash to make sure you feel safe in the eventual "Melt Down."

No matter what, never put yourself in a position to panic. Simply tilt your portfolio so that it's aligned with the opportunity the markets give you today.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: Doc has a strategy that can help you protect your portfolio, without missing out on the bull market's remaining upside. It can boost your potential profits when stocks rise... help you earn triple-digit returns on falling stocks... and even bring in 50%-100% gains on stocks that don't move at all. But to get started with Doc's insights at a huge discount, you must act before midnight tonight... Learn more here.

Further Reading

"This could make the difference between a life of incredible wealth, or crushing debt," Doc writes. Get the details on exactly what to do with your money today right here.

"Knee-jerk reactions can often create opportunities for patient investors who are willing to sort through the facts," Doc says. Learn more about where he's finding potential opportunity in the markets here: You Gotta Be Big.

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Market Notes


Today, we look at a suffering business in a capital-intensive industry...

Longtime readers know we love capital-efficient businesses. These businesses don't have to plow most of their earnings back into the company to grow. This gives them a huge advantage. They can use their profits to pay down debt or reward shareholders with dividends and stock buybacks. But today's company doesn't have this luxury...

The rental-car business is a model of capital inefficiency. And we can see this in action with rental-car company Avis Budget (CAR). Avis spends billions on upkeep for its fleet of rental cars every year. And with such high costs, it's almost impossible to generate strong free cash flow ("FCF"). This year, Avis expects to record roughly $350 million in FCF – less than 4% of its expected $9 billion in sales.

As you can see in today's chart, shares of Avis are plummeting. The stock has fallen nearly 50% from its highs this year, and it recently hit a new 52-week low. While capital-efficient businesses make some of the best investments, capital-inefficient businesses can cost you...