ISA Investing and How to Protect Your Gains – Part 2 of 2
By Stephen Sutherland, author of Liquid Millionaire.Posted in the Category of ISAS, Investing, Stock Market, Investment Fund, Wealth Building on 9th October, 2009.
Tags: gains, isa, isa investing, market direction, stock market boom.
How ISA Investing Can Help You Protect Your Gains in a Downturn
In recent blogs I have looked at how ISA investing has made it possible for me to make gains of 67.8%.
I have talked about the importance of determining market direction and how, by getting your timing right, it could be possible to make even greater returns from an imminent stock market boom.
But what about the times when the market is in decline?
Today I want to share with you in more detail the importance of exiting the market when it is in decline and some more invaluable tips to help you read the market like a pro.
Predicting the End of the 2003-2007 Bull Market
In Part 1 of this series I told you how I successfully predicted the beginning and end of the 2003-2007 bull market and how on 28th February 2007 my clients and I exited the market.
Even though the market did form another uptrend in the following 8 month period, it was not a market where you could make money.
Let me explain.
Every time the market gained ground, it quickly turned tail and came crashing down. It really was a horrible market environment and it felt really good to be out on the sidelines in the safety of a cash based fund. On 31st October 2007, the market finally and officially topped out. It then proceeded to hurtle south and the falls were sharp, fast and brutal. The Nasdaq bear market was made official (20% or more off a recent high) on 22nd January 2008.
But what is interesting to note is that the type of funds my clients and I invest in tend to drop more than the Nasdaq when the general market is falling. This indicates that staying invested in such a fund when the market is unhealthy is a strategy for amateur investors.
In other words, a typical fund will correct as much as 1½ to 2 times–or even more–when the market is in a downtrend. So if the market falls 25%, expect investment funds to possibly fall 33%-50%–or even more.
Taking a hit like that on your portfolio is going to be like getting a punch in the stomach.
Plus it is going to take you a long time to get that money back.
Let me remind you exactly how long:
• A loss of 33% requires a 50% gain just to get back even.
• A loss of 50% requires a 100% gain just to get back even.
• A loss of 90% requires a 900% gain just to get back even.
This is why you have to get your timing right or your portfolio could end up in a real mess. If you try to swim against the current, it will literally leave you gasping for air. And some of my clients who have seven figure plus portfolios were very happy about the fact that if they hadn’t followed my lead during 2007 and early 2008, their portfolios could have seen losses as large as £500,000 or maybe more.
Remember This and You Won’t Go Far Wrong
How the market really works is not my opinion.
As Jesse Livermore once wrote, “Markets are never wrong – opinions often are.”
How the market works is how the market has worked since it began in the late 1800’s. It is always about supply and demand and the way to analyse supply and demand is through looking at price and volume action on stock charts.
Don’t Believe the Hype
But many people are not aware of that key fact. When they ask for my opinion on what is going on with the market, I always give them the facts based on what the market has been doing. But unfortunately some people get sucked into the media headlines and mistakenly think that the facts I am sharing with them are totally wrong. For example, let’s say that the market has been acting really well and all the signs are showing that the institutional investors are seriously buying stocks.
That is a bullish indicator and tells you that the market is more likely to head north than sideways or south. But the news on TV, radio and in the newspapers at this time may be mentioning things such as “terrorism,” “war,” “recession,” “bear market” and any other forms of negativity. The best investors in the world never get sucked into the pessimism of the media and always instead look at the facts. I tell you all this because there are going to be times from this point onwards – where the market is telling you that all is well but the majority of people are saying the opposite.
Stay Away from Know-It-Alls
When I tell people that the market has been acting well – even though the news headlines say the opposite – it never surprises me when a person decides to challenge my market outlook. This challenger nearly always turns out to be a know-it-all who is totally fixed in their thinking.
This person might say something like, “But what about the price of oil?” or “A recession is looming and that’s going to affect the market,” or “The dollar is putting serious pressure on sterling right now.” But every time I hear this type of talk, I always refer them back to supply and demand and remind them about price and volume action.
I say to them, these are the facts. The facts say that right now all is well. I also remind them that I cannot predict into the future. But what I can do is to tell them what is happening right now and where the market is likely to head in the immediate term. Things can quickly change and the professionals from time to time alter their stance based upon new information. How this news will affect the market and stocks is constantly being fed to these professionals hour by hour and minute by minute.
How to Read the Market Like a True Pro
In other words, the big institutional investors can be bullish one minute but then discover some new information that overrides their optimistic outlook. At the end of the day, to effectively read the market like a true pro, you have to remember that it really does not matter what is happening news wise. Irrelevant of what the news or any market commentator is saying, if the price and volume is positive, then that’s good, period.
And that goes for the downside too. If all the headlines are positive but price and volume are saying the opposite, then you had better be thinking about switching into the safety of cash. The lesson here is simple. Do not let the news tell you what is going on or going to happen. Instead, look at what is really going on by studying the price and volume action on charts. But if you are pushed for time and have no inclination to become a proficient chart reader, get help from a professional with a great track record. Look for a person with integrity, a person who you trust and who matches your values. Do this and you won’t go far wrong.
If you would like to find out more about how to make gains on your ISA investments when the market is healthy and protect those gains when it is not the please contact a member of my team for a chat. You have my word there will be no sales, no jargon, just the facts.
Your friend,
Stephen Sutherland
The UK’s Leading Authority in ISA Trend Investing and Author of Liquid Millionaire
Please Note: As always, let me remind you that I am not a financial adviser and therefore not authorised to give advice on what investments to buy or sell.
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