A sense of panic has taken hold of the market this week.
This past Monday, we saw algorithms drive the market lower; most of the downdraft was due to computers and deleveraging. That’s why the move felt so aggressive and so quick.
Tuesday followed with the human trader reaction, as more fear creeped in around the edges.
The likelihood of a major coronavirus outbreak in the United States is increasing, and as such, related panic selling will not cease anytime soon.
The only question now is how bad the disruption will be, but one thing I can assure you of is that panic selling in moments like this has proven time and again to be the wrong strategy.
You have to remember how the game is played, no matter the severity of the event impacting markets, and that has been and always will be buy low and sell high.
Right now, we’re getting our “buy low” moment: a chance to continue to outperform the market over time.
Everyone will debate on when to get in, but it’s nearly impossible to time it perfectly. Instead, you should think about how to get in.
That mentality is the key to profits – and here’s exactly what you can do to help you win every time…
This Is Serious, but It Doesn’t Mean Panic and Sell
First off, I want to be very clear: The spread of the coronavirus is very concerning.
I’m certainly not downplaying that. We potentially have a far more serious situation than the media or any government is letting on – especially with the explosion of cases in Japan, Italy, South Korea, and Iran.
The markets hate uncertainty, and unfortunately, the coronavirus is serving us that in plenty. But one thing everyone forgets is this: Chaos creates opportunity.
And you know what that means.
Profits.
If you know how to play the game, you and your money will be protected no matter how unpredictable the markets get – and you may even be able to make a buck if you keep your profit targets tight.
As I’ve always said, having discipline and a set plan is key to not only surviving, but also succeeding in any kind of market or market event – and the coronavirus is no exception.
There are some “first steps” to take, like check your trailing stops and profit targets. You want to keep them nice and tight, meaning you’re ready to harness big winners and jettison anything that rolls over.
This is exactly why we set up trailing stops, to keep us disciplined when we want to sell and run away. When you have a 20% trailing stop in place, you stop the bleeding before you lose too much of your gains.
For anyone who needs a reminder on how to set these up, check here.
We will definitely look for opportunities to buy. And you should also have a list of stocks you want to toss – equally as important.
As for my buy list, I’ve got my eye on Big Tech, and other strong companies that focus on growth. Quality companies will always outperform the overall market over time, and that’s where you want to be.
While it’s best to be ready to buy, you don’t want to go all in right away. The sell-off isn’t done yet.
I’d like to say “buy the dip,” but this is an exogenous shock. That makes it very different from the fundamental shocks we’ve seen in the past. Wall Street wants you to buy the dip, so they can separate you from your money. We have no idea how steep and deep the sell-off could get, so there’s no need to rush a “buy,” if that makes sense.
So to remain disciplined and get into the positions we want in a smart way, I want to share the only “back to basics” technique I know of that’s never failed to produce huge profits over time.
It’s the best way for you to cut through the hysteria and line up big profits at the same time.
The Most Powerful Wealth-Building Tool for “Buying Low”
One thing I love about this Total Wealth technique is that anyone can do it. Young or old, rich or poor, just starting out or looking maximize your holdings and finish rich, YOU can do this.
It lets you buy into stocks and other investments by spreading out your money over time… days, weeks, months, even once a year… rather than diving in all at once.
The time frame really doesn’t matter too much.
What matters is that it lets you “buy the dips” when others are too scared to get in, but does so in a way that avoids piling in all at once.
This is a very important concept right now because it will help you score the biggest “deals” and line up huge profit potential that is practically immune to short-term fears… and longer-term pullbacks, if that’s what is keeping you up at night.
This is an especially good tactic to use on stocks you might otherwise think are “too expensive” for your retirement account – think Apple Inc. (NASDAQ: AAPL), Alphabet Inc. (NASDAQ: GOOGL), and Amazon.com Inc. (NASDAQ: AMZN).
This powerful technique is known as dollar-cost averaging. Here’s how it works…
Imagine you automatically send $300 each month toward a stock, let’s call it XYZ, for your retirement fund. It’s January, and shares of the stock are trading at $50 per share. Your automatic purchase of $300 worth translates into six shares:
$300 ÷ $50 = 6 shares
In February, perhaps there is a health scare in China that drives the stock down to $30. But, in sticking to your disciplined approach, you still devote $300 as planned. This time, your automatic $300 purchase translates into 10 shares:
$300 ÷ $30 = 10 shares
The following month, it trades at $46.15. You automatically devote another $300 and purchase 6.5 shares:
$300 ÷ $46.15 = 6.5 shares
By April, let’s say that there’s a rally and the stock hits $54.50 per share. You automatically pick up another 5.5 shares:
$300 ÷ $54.50 = 5.5 shares
After your April purchase, you’re sitting on 28 shares for an average buying price of $42.85 per share. In total, you spent $1,200 ($300×4).
Now, consider if you had instead spent all that $1,200 in one go back in April.
$1,200 total investment ÷ $50 per share = 24 shares
Owning 16% more shares can pay off handsomely over time – especially if you’re doing that with all your long-term buys.
What I like about dollar-cost averaging is that it helps keep risks low yet returns high because it prevents you from investing a single large amount at the wrong time… like now, for example.
I’m also a big fan of the discipline dollar-cost averaging instills because it takes emotion out of the equation.
And finally, dollar-cost averaging forces you to buy more shares when prices are low, which means that your “cost basis” – a fancy way of saying your total cost – actually drops, and that, in turn, means you have that much more profit potential!
Just imagine using dollar-cost averaging back in 2008 and 2009, when people thought the end of the financial universe was upon us…
Let’s say you invest $10,000 into AAPL in September 2008. You’d be sitting on 421 shares worth only $5,313 as of March 3, 2009.
Had you staggered your purchases for three months starting that same September, though, your holdings would be sitting on 581 shares worth $7,333 on the same day. Both are losses, and that’s no fun.
Here’s where it gets interesting, potentially very profitable, and so powerful…
Apple would have to rise only $4 per share for you to break even if you’d used dollar-cost averaging, versus needing gains of $11 per share for you to break even if you went all in.
More to the point, 12 months later, you’d be sitting on profits of 37.98% because of dollar-cost averaging versus barely breaking even had you invested all at once.
It’s a powerful and very compelling performance advantage that capitalizes on your skepticism yet keeps you in the game, even if stocks still have a way to go before they find another bottom.
Remember this – what’s happening right now is going to be nothing more than a blip on the radar in the long term. The story remains more about short-term disruption than long-term destruction. For now, at least.
That’s why I’ll continue keeping a watchful eye on markets in order to bring you the latest updates and the best moves to make for you and your money.
— Keith Fitz-Gerald
Source: Money Morning