January 7th, 2014
A Crude Wealth Preservation System - But A Whole Lot Better Than Nothing
by William Kurtz
The Dow Jones Industrials Index is close to its all-time High, after a dynamic runup from March 2009. Most of the prime stocks themselves are close to their own all-time Highs, as well. Can the Dow and the individual stocks climb even higher? Maybe; but in any event, I think that the party is almost over, and that we are about to see a powerful downside move in the Dow, which at least to some extent will carry most of the stocks along with it.
There is a great amount of unrealized appreciation sitting in the major Indexes and in most individual stocks. My fear is that many private investors' portfolios have no wealth preservation system in place - that they are completely exposed to the possibility of a storm.
This makes no sense, especially when "catastrophe insurance" can be overlaid upon existing Long positions by a simple telephone call at zero cos.t.
All it would take is the installation of "safety sell-stops" underneath present prices, to get you out of the positions.
You might object, and say "But where shall I place them? How far below present prices? How can I know what is the right price for a safety sell-stop?" The short answer is, "There is no such thing as a right price or a wrong price; but almost ANY price below the present price is better than NO price." The point is to get some degree of wealth preservation in place. The rest lies in the details.
You don't want a "safety sell-stop" to be TOO close to the present price, for otherwise you might be "taken out" by small moves or by "market noise." What you want, it seems to me, is "catastrophe insurance," so you will need to be prepared to lose a little (something like the "deductible" amount in your house or car insurance policy) in exchange for coverage where you need it most.
So, where should you set a "safety sell-stop?" Let's just pull a number out of the air and see how it "fits" - say, you're willing to take a 10% hit, but not more than that. In that case, if you own a Dow ETF, you could set the "safety sell-stop" at the equivalent of 14822.99 on the Dow, based on last Friday's Closing number. If you own ExxonMobil, you could set it at $89.56. If you own Procter & Gamble, you could set it at $72.41 - all done by a telephone call to your broker! Or, if you like those stocks and their dividends, you can hold onto the stocks and buy downside "insurance" another way - and even pro.fit if the market declines, if you want to get fancy about it.
You can apply this crude but effective system to any stock that you own. You say that you don't want to be out in a storm with the possibility of even a 10% los.s out of your own pocket? Then how about 8%? Or 7%? Or if 10 % seems too conservative for you, then how about 15%? Or 20%? Pick a number. Just pick a number, and get it working for you.
This is Wealth Preservation without the glitz, but it works.