In Defense of Those “Risky” Wall Street Bets

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
wall street bets 0

Editor’s Note: This piece originally ran in February in our sister publication, Wealthy Retirement. You can go here to subscribe if you haven't already. It's free.

“You’ll never make that money back!” the pitchman breathlessly exclaimed.

The guy on the radio was selling annuities and warning investors not to put their money in the risky “Wall Street casino.”

He tried to scare listeners by telling them that if the market crashed, like it did in 1987, or if we have another nasty bear market like in 2000 or 2008, “it would take a lifetime to make that money back.”

He couldn’t be more wrong.

On October 19, 1987, or “Black Monday,” the Dow Jones Industrials Average plummeted 22.6%.

It was the biggest one-day drop in U.S. stock market history.

But it didn’t exactly take a lifetime to recover those losses...

In fact, it took just 15 months.

wall street bets 1

During the financial meltdown of 2007 and 2008, the S&P sank a whopping 57% from its high in October 2007.

This one took longer to recover, but the index was back at October 2007 levels by April 2013.

wall street bets 2

Five and a half years is a long time, but hardly a “lifetime.”

In fact, if you had such incredibly bad timing that you entered the market peak in 2007, but held on until today, you’d be up 87.1%, or just about 7% per year.

That’s just slightly below the market’s historical average of 7.6%. Not bad considering you’d have bought at the market top right before the worst collapse since the Great Depression.

My point is that the annuity salesman exaggerated the market’s risk to make annuities sound attractive.

It takes a lifetime to recover from a bear market or crash only if you sell into the panic.

Historical Proof

When I wrote Get Rich With Dividends, I looked at the market’s 10-year rolling returns.

Since 1937, there were only seven times when the market was not positive over 10 years: the years ending 1937, 1938, 1939, 1940, 1946, 2008 and 2009.

So in other words, you had to sell during the worst economic and stock market downturns in history to lose money over 10 years.

And there were plenty of periods associated with those bear markets where you still would have made money.

For example, if you had been invested in the broad market from 1932 to 1941, you still would have made money, despite the Great Depression.

Even investing at the beginning of 2001 - and enduring a good chunk of the dot-com crash, and then the entire Great Recession of 2008 - you’d have still been up 12% if you sold in 2010.

So the idea that you’ll never make back any money (that you may be down on paper) in the next market crash is nonsense.

Here are three steps to ensure that you can ride out the next bear market...

  1. Don’t invest money you need in the next three years. Keep funds needed to pay bills during the next three years in cash or in something ultrasafe, such as a money market account or CD. (EverBank’s Yield Pledge Money Market account is a good option to earn higher yields.) You can also consider short-term Treasurys. That way, if the market falls, you know that you can still pay for your immediate needs.
  2. Invest in Perpetual Dividend Raisers. If you’re receiving a solid yield, that will help alleviate some of the pain of a bear market. Plus, if the company is continuing to raise its dividend, that’s a good sign that the company’s fundamentals are still solid. (The Oxford Income Letter portfolios are full of these kinds of stocks.)
  3. Use a sell-stop strategy. Setting a stop loss when you enter a trade will ensure that you don’t make emotional decisions to sell when markets fall. There are different kinds of stops (hard stops, trailing stops, etc.), and the one you use will depend on your exit strategy. You should never enter a position without a clear idea of how you will get out of it. The Oxford Club has made it easy by tailoring a custom stop strategy for each of its 15 trading services and newsletters. But if you’re investing without professional help, software like TradeStops makes it simple for individual investors. Using a stop strategy will ensure that if a bear market hits, you’ll get out with gains or minimal losses.

Bear markets happen. They’re not fun. But they’re not the end of the world either.

Understand that it doesn’t take your whole life to make back paper losses.

And if you take the above steps to minimize the damage of a bear market, you won’t get freaked out by a downturn or by an annuity salesman trying to scare you into his product.

Good investing,

Marc

Thoughts on this article? Leave a comment below.

This Stock Is Worth Four Times as Much as It Was Before the Last Market Bottom

Alexander Green’s Oxford Trading Portfolio has brought several triple-digit gains to Oxford Communiqué subscribers.

One such gain was on Philip Morris (NYSE: PM), which is up 314% since Alex recommended it.

Even more incredibly, that initial recommendation was in early 2009 - in the midst of the Great Recession and a 57% drop in the Dow.

Here’s Alex checking on Philip Morris earlier this year...

Smoking isn’t just addictive. It’s the single greatest cause of preventable death worldwide.

To some, this makes Philip Morris, the leading international tobacco company, Public Enemy No. 1.

Yet there is another way of looking at the company. Let’s call it the libertarian view...

Everyone knows that smoking cigarettes is foolish. But then, so are gambling, binge drinking, engaging in sexual promiscuity, skydiving, cage fighting, riding a motorcycle on the freeway, and playing tackle football with testosterone-charged Goliaths who weigh 300-plus pounds.

None of those activities hold any appeal for me. But it’s a freedom issue.

Of course, freedom means that you are also free to not own shares of Philip Morris. But it has been awfully profitable for those who have.

Philip Morris netted $7 billion in 2016 on sales of $26.7 billion. Including dividends, the shares in our Oxford Trading Portfolio are up 314%.

Because the company generates a significant percentage of its revenue overseas, net income has been negatively impacted lately by the strong dollar.

Yet tobacco is largely recession-proof. Sales are booming, especially in the world’s emerging markets. And the firm has plenty of cash and ample cash flow. It is currently sitting on more than $4.2 billion.

Philip Morris is also committed to something dramatic: replacing cigarettes with smoke-free products.

It has over 400 scientists, engineers and technicians developing less harmful alternatives to cigarettes at its two research and development sites in Switzerland and Singapore.

Here’s why...

Tobacco smoke contains nicotine, as well as many harmful chemicals. It is the chemicals - not the nicotine - in cigarette smoke that are responsible for smoking-related diseases.

The company’s cigarette alternatives deliver the nicotine that smokers crave, but without the smoke. Over a million people have already given up smoking and switched to these new products.

Of course, a smoke-free future is still a long way off. Philip Morris sells over 850 billion cigarettes a year.

In the meantime, the stock offers better-than-average appreciation potential... and a current yield of 3.59%.

- Samuel Taube with Alexander Green

Live Twitter Feed