A Dead-Simple Method to Manage Your Risk

It's true that owning volatile stocks can result in big gains. The problem is, most individual investors don't understand risk at all... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [DailyWealth] Editor's note: As 2023 comes to a close, we're revisiting some of our favorite essays from our editors at Stansberry Research. They're full of timeless advice on how to build confidence and make great investments – no matter what the market is doing. Today, we kick things off with Dr. David "Doc" Eifrig... In this piece, which we last shared here in May 2018, Doc explains one of the simplest ways to think about risk in your portfolio – and how this idea can help you keep your losses small. Also, the markets and our offices will be closed for Christmas, so we're taking a short break here at DailyWealth. We'll pick up our normal schedule on Tuesday, December 26. We hope you enjoy the holiday season! --------------------------------------------------------------- A Dead-Simple Method to Manage Your Risk By Dr. David Eifrig, editor, Retirement Trader --------------------------------------------------------------- It's a simple question... And it has a simple answer... What sort of return do you need from your portfolio to pay your bills or enjoy your retirement? $2,000 per month? $4,000? $8,000? That's the focus of nearly every investor. Whether you're interested in spending wealth in your retirement or building wealth for future use... investors focus on returns above all else. Most people think that to generate eye-popping returns, you have to pump lots of money into small, "risky" stocks. Isn't that what we're always taught... that risk equals reward? The more risk you take, the greater your potential returns? It's true that owning volatile stocks can result in big gains (as well as big losses, if you're not careful). The problem is, most individual investors don't understand risk at all... Many folks equate volatility with risk. But the secret to generating big returns lies in managing risk and harnessing volatility. So today, I want to talk about some ways to clarify your understanding of risk. --------------------------------------------------------------- Recommended Links: [Doc's Special Holiday Invitation]( Dr. David "Doc" Eifrig has achieved the "impossible" – racking up 184 winning trades in a row and counting – with ZERO losers. Now, he's throwing a celebration, and all the "gifts" are for you. In the spirit of the holidays, Doc is reopening his best offer EVER on his No. 1 favorite strategy of all time... and the greatest, by far, for this confusing market. [Click here for the full details from Doc](. --------------------------------------------------------------- [Sell Your Stocks by January 1, 2024?]( It doesn't matter if you have money in the markets right now or if you're waiting on the sidelines. The early days of 2024 could have the power to make – or destroy – fortunes. And what you do with your money before January 1 could determine your wealth for the next decade. [See what's happening and how to prepare immediately](. --------------------------------------------------------------- Rather than develop a complex, but flawed, analysis of risk... it's more helpful for an investor to think of "risk" in a simpler form: How much could I possibly lose? So first... what is risk? It's impossible for most people to quantify all the potential challenges that could cause a stock to fall – new competition, regulatory changes, and macroeconomic trends, to name a few. It's more useful to simply think of risk as the money you could lose on any one investment. If you normally invest $10,000 on a position with a 25% stop loss, then your usual level of risk is $2,500 per position. Longtime readers know I typically recommend using a 25% stop for an exit strategy. (Remember, a stop loss is a set price or percentage you use to know exactly when to sell an investment.) But readers often wonder if you should use a different percentage at certain times. Let's say you're interested in a stock that has the potential to make a big move in a short period. We want to buy that stock to capture the next big swing upward... That's what we'd call "harnessing the volatility." Holding that stock with your typical 25% stop could force you out of the position before you capture those gains... Remember, the stock is volatile, which means the shares move around a lot. So instead, you want to hold it with a 50% stop. But look at what that does to your risk... With that $10,000 position, you're now risking $5,000. You've doubled your risk. But you can reduce that extra risk with a simple step... If you want to keep your risk level to $2,500, you would reduce your initial investment to $5,000. You could also go even smaller to risk less in this kind of high-variance position. We tend to recommend a wide 25%-to-35% stop for more volatile positions, like oil and gas stocks. This will allow for the cyclical swings in share price that the commodity industry is known for without kicking you out too early. Similarly, we tend to recommend a narrow 15%-to-25% stop for less volatile positions, like well-established companies that dominate their industries. Blue-chip businesses like Johnson & Johnson (JNJ) and McDonald's (MCD) are so large and liquid that their share prices don't tend to move much. As an investor, having an exit strategy is vital to your success. If you stick to your exit strategy, it can serve as a near-foolproof way to methodically cut your losses and let your winners ride. Here's to our health, wealth, and a great retirement, Dr. David Eifrig --------------------------------------------------------------- Editor's note: Doc has notched an uninterrupted streak of 184 winning trades over the past three and a half years – with zero losers – thanks to one simple strategy. It's a remarkable approach that can set you up to collect instant payouts in the market... And it actually benefits from volatility like we've seen this year. If you're curious, don't wait... because for a short time, you can claim the lowest price we've ever offered for this research. Plus, this deal comes with special terms we never share anywhere else (including three full months to try it out). [Get the full details right here](. Further Reading "Everything you hold today, you essentially decide to 'buy' anew each and every day," Doc writes. Are your longtime investments strong performers? Or are you clinging to positions that just aren't working? One simple test can tell you when it's time to let go... [Learn more here](. Investors today have more information at their fingertips than ever before. But you can easily get bogged down in old data – or end up paralyzed by indecision. Before you buy your next stock, here's how to focus on the details that matter... [Read more here](. --------------------------------------------------------------- [Tell us what you think of this content]( [We value our subscribers' feedback. To help us improve your experience, we'd like to ask you a couple brief questions.]( [Click here to rate this e-mail]( You have received this e-mail as part of your subscription to DailyWealth. If you no longer want to receive e-mails from DailyWealth [click here](. Published by Stansberry Research. You're receiving this e-mail at {EMAIL}. 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