Yes kids, stock prices can sometimes plummet. And they did
during the first trading session of 2016. It's a helpful
reminder to forgetful innocents about this unforgiving fact.
The chart below shows how the SPDR S&P 500 ETF
(NYSEARCA:SPY) has declined 1.65% over the past month. That in
itself isn't disastrous, but stock market volatility
(ChicagoOptions:^VIX) has already popped 10% or more four times
during the past month. In other words, the frequency and intensity
of violent moves (NYSEARCA:VIXY) has increased.
trading costs in half + Recap of Portfolio Report Cards from
Predictably, high beta darling stocks like Netflix
(NasdaqGS:NFLX), Tesla (NasdaqGS:TSLA), and Amazon.com
(NasdaqGS:AMZN) have nosedived even more than the broader
Back in 2008, the Federal Reserve was able to rescue the
financial system from a complete meltdown. But eight years later,
there's a lot less certainty they'd be able to repeat another Hail
In new comments from Vice Chairman Stanley Fischer at a speech
for the American Economic Association this past weekend, he flatly
admitted the Fed's limitations.
Here's what Fischer said about the Fed's inability to contain
another financial crisis:
"We won't know until it's very late" whether the Fed has been
constrained too much. It's something "we have to worry about a
Here's what Fischer said about the Fed's challenge in executing
"In the United States, responding to such problems with these
tools would require inter-agency coordination" between the Fed
and other government regulators. It "could make their use
cumbersome at critical moments."
Instead of waiting for the Fed to save you from the next crisis,
what should you do? The answer is to install a margin of safety
within your portfolio
. It is the single most important thing you can do right
The prudent investor does not wait for a bear market or another
adverse event to assassinate their net worth before incorporating a
margin of safety. It should always happen
the event. Similar to insurance, you acquire coverage before
the loss occurs
Your "margin of safety" represents the capital or money that you
absolutely cannot afford to risk to potential market losses. This
amount of money gets set aside from your core and non-core
portfolio to be invested in fixed accounts with principal
protection and liquidity. Yes, protecting money - not just saving
it - is essential!
The diagram below is explained in my online class
Build, Grow, and Protect Your Money: A Step-by-Step
It teaches you the the proper context of your
portfolio's margin of safety relative to the other two parts: Your
portfolio's core and non-core. It also shows you what types of
assets can be held inside each container. Together, these are the
three cornerstones of an architecturally strong portfolio.
To help you be ready,
ETFguide Premium members
get exclusive access to my Margin of Safety worksheet.
It helps you to calculate the correct percentages of safety within
your total portfolio.
Although the original application of margin of safety was to
applied to selecting stocks by Graham and Dodd, the same principle
applies to portfolio construction. It's crucial that all investors
have a margin of safety - even those who believe they need none.
It's always better to have it and not need it, than to need it and
not have it.
In summary, investors themselves - not the Federal Reserve and
most certainly not the Securities and Exchange Commission - are
responsible for protecting the safety of their money. Do yourself a
giant favor and do it right now.