Editor's note: Today, we're finishing up our holiday series with a timely reminder. This DailyWealth essay originally ran at the end of 2013. Stocks were hitting new highs... And our readers were scared the market was nearing its peak. Sound familiar? Read on for lessons about how to invest at record highs...
I just received a fantastic letter from "Pastor Mark" – a new subscriber.
Pastor Mark's fear is the "right" fear to have right now...
He's worried about buying in at this point, after the U.S. stock market has run up so much and is sitting near record highs.
Boiling it down, he says, "I don't really want to buy into some of the positions that have already run up so much."
He asked me to share "some practical insight, guidance, or suggestions on the best way to enter the positions and what positions might want to be avoided if entering in at this stage of the game."
Pastor Mark says he's new to investing. Fortunately, he's been "doing a lot of research and reading," which is clear from his letter. And he says he's "ready to jump in, albeit with fear and trepidation."
Pastor Mark, you are not alone in your worries... I am certain thousands of other folks are thinking the same things you are right now.
Let me focus my answers on how to start out buying now, especially with stocks at new highs...
1. You can ALWAYS find reasons NOT to invest... the hard part is overcoming those reasons.
This is one of the most important concepts you can possibly learn...
In December 2010, I wrote in DailyWealth:
There's ALWAYS a reason NOT to invest. It's incredibly easy NOT to invest. It's much more difficult to puff your chest out, hold your head high, set your fears aside, and put your money to work.
You can always come up with an excuse to NOT put your money to work. In that essay, I said, "Nobody will fault you for not investing. Meanwhile, you won't make any money."
You will never be a massively successful investor unless you understand this concept and learn to overcome it.
Having said that... when stocks are at new highs:
2. You must play good defense, first and foremost.
Before putting new money to work, the first question you must answer is, how much money are you willing to lose?
I'm serious. Most people are thinking about how much money they could make, or how much they've missed out on. But you can't control either of those. But you do have some control over how much you are willing to lose...
For example, you could use stop losses. A "trailing stop" follows your stock higher – if it falls a given percentage from its highs, you'll sell. Or, you could use a hard stop at a set price when you'll sell no matter what.
If you have $50,000 in savings, and you are not willing to lose more than $5,000 of that, then you must use 10% stop losses across the board. This is even more crucial after a huge run-up in stock prices. (You can read more about trailing stops right here.)
3. Don't worry about how much stocks have gone up... Worry about what you are getting for your money.
There's no denying that U.S. stocks have gone up – a lot. But with bonds paying you next to nothing, and your savings account paying you even less, U.S. stocks are still a good value compared with all other financial investments. If you are worried about buying them now, read No. 1 on this list again.
4. Be willing to look beyond U.S. stocks.
You'll find better values in several markets outside the U.S. today.
You may wonder why I keep buying U.S. stocks when I think other countries are better deals. I think being fully diversified across all of these sectors is the way to go. We've made big gains sticking with the trend in U.S. stocks... And we know the value is there in foreign stocks. Our eggs are spread out over a few baskets.
One crucial fact here... Typically, when the U.S. sneezes, the rest of the world catches a cold. What that means is foreign stocks will likely fall if U.S. stocks fall. Don't think that because you're buying cheaper stocks outside the U.S. that you are safer.
In my opinion, foreign stocks have more upside potential from here, so I want to own them. But they are certainly not immune from downside risk.
So, to invest at new highs, at minimum, you must:
- Learn to overcome your objections.
- Play good defense.
- Don't worry about how much something is up... worry about what you're getting for your money.
- Be willing to look beyond U.S. stocks.
All of these are difficult to do. You can understand these concepts rationally... But emotionally, something happens inside that makes them difficult to implement.
Pastor Mark, I can't give you all of the answers neatly in one little DailyWealth essay. Hopefully today's essay gives you some of the insights – and the confidence – to do what's right for you...
Good investing,
Steve
Editor's note: Stocks are at new highs today. But remember, last December was the worst month for stocks in almost 90 years... And for most investors, it was a truly frightening time. Recently, Steve went on camera to share the No. 1 thing you can do to protect your gains in the coming "Melt Down" – and maximize your profits while the Melt Up continues. Get the details here.
Further Reading
"A great run higher doesn't necessarily mean it's too late to buy," Whitney Tilson writes. So make sure you don't miss out on stocks that go higher... and higher. Get more details here.
"Many investors don't fully understand their risk tolerance," Dr. David Eifrig says. Taking the right amount of risk – not too much, and not too little – is crucial to your investing success. Ask yourself these three questions to unlock your portfolio's potential... Read more here.
It's the first nearly infallible warning sign that a big trend is coming to an end...
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Advanced Micro Devices (AMD)... semiconductors
Microsoft (MSFT)... "digital utility"
Apple (AAPL)... iconic tech brand
Facebook (FB)... social media giant
Alibaba (BABA)... Chinese e-commerce giant
Shopify (SHOP)... e-commerce platform
Visa (V)... payment-processing giant
Citigroup (C)... financial services
PNC Financial Services (PNC)... financial services
Two Harbors (TWO)... real estate investment trust ("REIT")
CBRE Group (CBRE)... real estate services
MGM Resorts (MGM)... casinos and resorts
Marriot (MAR)... hotels
Johnson & Johnson (JNJ)... consumer-goods giant
Freshpet (FRPT)... premium pet food
Estée Lauder (EL)... beauty products
Tesla (TSLA)... electric vehicles
Merck (MRK)... pharmaceuticals
Pan American Silver (PAAS)... silver
Newmont Goldcorp (NEM)... gold
NEW LOWS OF NOTE LAST WEEK
Tilray (TLRY)... cannabis
Aurora Cannabis (ACB)... cannabis
AMC Entertainment (AMC)... movie theaters
