There is a disturbingly high level of risk to buying stocks at these prices. Here’s what stock market investors are up against…
by Zach Scheidt of Daily Reckoning
Bulls TRAMPLED In Stock Market Stampede
When the market started moving lower, investors did the smart thing… They started unloading their risky positions.
The only problem was, everyone was trying to sell at once!
As panic set in, buyers stepped back. There was no sense in owning shares if prices were dropping quickly. Why not wait for a more stable environment?
But of course, with no buyers, a herd of investors trying to exit the market had nowhere to go!
It wasn’t until after weeks of panic, volatility, and gut-wrenching losses that the market finally started to act normal again.
That’s a quick synopsis of what happened during the financial crisis of 2008. Yes, there were problems with many of the companies whose shares traded sharply lower. But the biggest issue causing markets to drop suddenly was a total reversal of investor perspective.
In other words, just about everyone turned from bullish on financial stocks — to bearish on financial stocks — in a very short period of time.
And the fallout was devastating.
Unfortunately, today we have a similar situation setting up for some of the most loved (and risky) stocks in the market…
A Disturbing Level of Risk
This week, I came across a chart that scared the living daylights out of me. Take a look and tell me what you think. (Send your emails to [email protected] — or better yet, comment on my twitter post here.)
The chart shows that institutional investors have loaded up on risky investments and are holding more leverage (often borrowing extra capital to invest) than at any other time this century.
That makes me feel all warm and fuzzy inside…
This chart is even more disturbing than the lopsided sentiment chart that we looked at last month. Because here, instead of polling individual investors, the risky culprits are the big elephants in the room.
These guys aren’t just making risky bets with a retirement account worth a few hundred thousand — or even a few million. No, these guys are wielding billion dollar positions that are now parked in some of the riskiest opportunities the market has to offer.
Picture a herd of elephants camped out at a watering hole surrounded on three sides by cliffs. There’s only one way for this herd to exit.
Now, imagine what happens when a lightning strike, a predator, or even just an unusual scent spooks this herd.
Each of these 6-ton beasts will head for the exit. All pushing and jockeying for position to get out of danger as quickly as possible. If you’re competing for a spot in the exit path, good luck!
That’s exactly what I’m worried about in the markets right now. With so many 6-ton investors all camped out in the same risky spot, the scene could get ugly very quickly if you’re a small investor in the same risky position.
How to Avoid The Stampede
As an individual investor, it’s of paramount importance that you protect your own capital.
It’s not fair, but if these managers lose a ton of money, they’ll likely get a slap on the wrist, or at worst have to find another 7-figure job.
You, on the other hand, have to live within your means. And if your retirement account gets crushed, your means will become much smaller. So the stakes are much higher for investors like you and me than for the Wall Street swindlers — I mean managers…
That’s why it’s so important for you to protect the wealth you’ve worked so hard to accumulate.
But that doesn’t mean you have to pull your money out of the market completely, and lose out on opportunities to grow your wealth. That would be a horrible long-term plan and would leave you with less spending power as inflation erodes the true value of your wealth.
Instead, you need to be very strategic with how you build your wealth so as to avoid the big pitfalls that crush naive investors. Today I’ve got three quick guidelines that will help you avoid getting trampled in the next stampede and still give you lucrative income for your retirement account…
1) Avoid the Hype — In today’s market there are a handful of stocks that are capturing too much attention and way too much capital. The big stocks like Amazon.com (AMZN), Netflix (NFLX) and Alphabet (GOOG) are obvious examples. And you need to avoid these risky plays.
But there are other stocks to be wary of too. The best way to identify risky stocks is to look at how much a company earns per share, and compare that to the company’s stock price. If earnings are very low, and the stock price is very high, there’s a good chance this is a risky stock with potential to drop dramatically.
2) Take a Balanced Approach — We’ve talked a lot about this concept in previous articles, but it bears repeating over and over again. Smart investors don’t put all of their eggs in one basket. In fact, smart investors don’t even put all their eggs in the same kinds of baskets.
Instead, it is important to spread your wealth into different areas that have very little to do with each other. A well-diversified retirement account should have blue chip dividend stocks, corporate bonds, some precious metals, exposure to real estate, and more. Look for ways to spread your wealth so that if one area falls, another area will likely make you more money.
3) Consider Alternative Income Strategies — I’ve got a few different strategies that I use with my own money to help pull income from the markets week after week. Selling put contracts on stocks you want to own is one of the best ways to pull money out of the market while taking much less risk than you would as a traditional stock buyer.
You can read all about this particular approach in my Income on Demand trading service. And while it may sound complicated at first, you’ll soon see that the process is so easy, we taught this strategy to complete strangers on the streets of Baltimore in just minutes.
I never want to sound like an alarmist. And it could be that the indicator I showed you today remains “risky” without a market drop for quite some time.
But I’d much rather warn you about a risk so you can take action today, then find out later that I could have done a better job protecting your wealth.
I hope you have a great weekend!
Here’s to growing and protecting your wealth!