Ways to Protect Your Investments on Huge Market Drops and Systemic Loss

DISCLAIMER -  I am not a Financial Advisor and do not work for any Brokerage Firm. The opinions given are of my own and are not to be used as professional advice.  These are my findings and can hopefully help you to make informed decisions on investing.  Consult a Broker or Lawyer before making any investment. 

We hear a lot of brokers and investment professionals promoting diversification as a method to prevent loss in the stock market.   While being balanced has some logic to it and does prevent some losses, what happens when the market has systemic loss?   This is when all the market goes down.  Your retail stocks go down at the same time utilities, banking, and high techs go down.  You watch as all other classes go down like we had happen in early 2022.  During that time, I lost 30% of my stock market portfolio value.

When the whole market drops 20 to 40% in a short span of time, diversification does not lessen the blow.   In 2022, not only did we lose money on stocks and ETFs, but bonds also suffered losses.

Today I am going to go over a way I have learned to protect against systemic loss.    Before that, we will discuss some other methods to prevent losses.
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One of the reasons many people refuse to invest in the stock market is the fear of loss.  It is real, and I understand your feelings.   Anyone who says that big market drops do not bother them either has very little in the market or the money is of little significance to them. 

For years, I have recommended riding out the market bumps with the ebbs and flows.   And for all the bull markets we have seen, they are always followed in time by a bear market. 

If you are unfamiliar with those terms, a bull market means stocks are going up the majority of the time, whereas a bear market is when the stocks are dropping most of the time.   Trying to time the market is very difficult.

I tried a few times and found that most of the time I was either late in selling or waited too long after the bottom to buy back in. Typically when the market rebounds, it is by 1,000 to 2,000 points.   So on those days, you want to be invested to gain the most traction and good returns.    

I have tried to take the buy and hold strategy the last few years, and have done well. However, a huge drop in the market can throw a wrench in your plans when you reach your retirement years like me.  The reality is that a huge loss would be very difficult in which to recover.   A young person can lose a lot and still come out in the long term.  So this article is geared toward you that are in your 50s or older.   However, some of the strategies might be wise even for the younger audience due to the current market. Below is the method I have for years recommended.

This article from Fidelity came out in June urging people to stay the course even in the choppy markets.

Fidelity shows that people churning money in and out on a whim rarely break even with the people who continue to buy when everyone else is panicking.
 
Here is an excerpt from that Fidelity article:

Stick with your plan, even when markets look unfriendly 

When the value of your investments falls, it's only human to want to run for shelter. But the best investors don’t. Instead, they maintain an allocation to stocks they can live within good markets and bad.

The financial crisis of late 2008 and early 2009 when stocks dropped nearly 50% might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines.

In the decade following the start of the crisis in June 2008, those who stayed invested saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. That's twice the average 74% return for those who fled stocks during the fourth quarter of 2008 or the first quarter of 2009. While most investors did not make any changes during the market downturn, those who did make a fateful decision with a lasting impact. More than 25% of those who sold out of stocks never got back into the market and missed the gains that followed.

If you get anxious when the stock market drops, remember that’s a normal response to volatility. It’s important to stick with your long-term investment mix and to have enough growth potential to achieve your goals. If you can’t tolerate the ups and downs of your portfolio, consider a less volatile mix of investments that you can stick with.

So the old, proven, continual purchasing whether the market is up or down appears to be a good way to go.  The term is dollar-cost averaging.  If you buy when the stock price is high and sell when it is low guarantees a loss. But if you purchase while the price is down, the average price per share drops. This hopefully gives you the ability to make up quickly for earlier losses.   

With that being said, let’s look at where we are here in November of 2023.  I think a little insurance might be wise at this time.  Normally when the bellwether stocks go down, the bonds kick in to offset some of the losses.

Will a bull market return?

A bull market is likely to return, as it typically has. But when? Well, every period is different and there can be no guarantees. We have had about 1000 point up market since mid October.    
 
I personally at my advanced age have 30% of my investments currently in Cash or bonds, with a large segment weekly going to I-Bonds.  This is probably too much in stocks to be honest.  After bonds and CDs, the next thing to invest in is the overall stock market indexes.  ETFs like:  ITOT   VTI  SCHB   VOO  SPY etc.   Having some of your money in good quality Growth Mutual Funds is always a good conservative investment.

And then be sure you have some investments across all the 11 sectors of the market.   Mutual funds help to give you a lot of diversification.   I discussed those 11 sectors in my article on investing with ETFs.

When you diversify, that helps you to offset bad sectors with those that are great.   All of the time some sectors are outperforming others.  This year the oil and gas business has been up again this year as well as the high tech stocks.   Health care is another sector performing well in the current market.

If you are diversified, and have a lot of money in full market stock indexes, does that guarantee you no loss in a huge drop in the market?   No, it does not.  That is why I am so cash conscious right now.  When you look at the news, with problems all over the world, Russia invading Ukraine, and the leaders in Washington out of step in almost every area, what is the likelihood that we will go from the current 33,900 NYSE average to 36,000? 

It might happen, but with all the gloomy news, we may be ready for another huge drop like in 2008 or 1972 or worse of all, 1929.  I wasn’t around for the great depression, but I remember both 2008 and 1972, and both were hard to bear.   I hate to be a bearer of bad news, but realistically, we could go from 33,800 to 25,000 very easily, and a drop to 15,000 would not be impossible.

That would mean a 50% or greater loss in your average stock holdings.   Can you withstand a loss of 50%?   I am too old to recover from such a huge loss.  If you are in your 20’s, you probably could.  But would it not be smarter to have some insurance against such a catastrophic loss?

Warren Buffet, probably the world’s most respected investor, has 2 rules that he follows.  Rule Number 1 is to never lose any money.   Rule Number 2 is to always remember Rule Number 1. 😊

In the past two years, I have read 4 of Richard Kiyosaki’s books in the Rich Dad, Poor Dad series.   Last year, I watched one of his online seminars, and in that presentation, he said he does all he can to NEVER lose money.  (like Warren Buffett.) Now to never lose money and invest is pretty much impossible, but there are ways to hedge your losses.    Mr. Kiyosaki introduced me to several, and one of them I want to cover today.   

This method is like having an insurance policy.     How this is done is by issuing a STOP LOSS sell on your stocks and ETFs.   Mutual funds and Nasdaq stocks are not eligible for this, but the ETFs and Stocks with 1 or more shares held are. If you have never heard of a stop loss sale, let me explain it a bit.   A stop loss LIMIT order allows you to specify the price you will receive on the stock or ETF when you set the value to trigger the sale. 

Now, remember that a down market generated this sale.  Is it possible that if you specify a LIMIT, you will receive it?  Possibly, but unlikely.   So, your order might never process.    Now if you do not specify a LIMIT on the stop loss order, then it probably will be filled, but not at the price that you specified to submit the sell order.   You would receive the current market price if there is a buyer. 

So if you specify the stop loss to be issued at $40 for example, probably the best you could hope for would be $39 or a bit over.  And someone has to agree to buy it.  For every sell order, someone has to buy.   So if it is a huge market drop, your $40 stop loss might wind up sold for $35 or not at all.   So keep in mind, that a STOP LOSS order is not a contract for the price you specified.   Just a request to sell at the current market price.

What I did this past week was I went into my holdings at Fidelity and Schwab, and  any with a substantial balance on them, I clicked on the SELL tab.  From there, I choose   STOP  or STOP LOSS (depends on the broker), and you key in the price you want to trigger the sale.   As I mentioned earlier, I buy all my stocks and ETFs to hold long-term, so I do not want them to sell on a minor bounce in the market. 

Richard Kiyosaki suggested using 80% of the current value which is what I used.   So on a $50 stock price, if it goes to $40, it will trigger the sale.  Now of course this does mean I would lose 20% of the value of the security, but a 20% loss is so much less than a potential 50 to 80% loss.  

I do not use Stop Limit orders, just Stop orders. So when the price hits the specified price it triggers a sale at market value.   You may not get that price but it should be close.   On risky investments, I set the stop loss at 92% of the current price and review them monthly for gains and move the price up.   On what I consider good investments paying solid dividends, I set the stop loss at 85% to prevent unneeded sales in market daily fluctuations in price.

At Fidelity, I chose a GTC order meaning Good until closed or canceled.   I did the same at Schwab, but their GTC orders are only good for 60 days.  So in 60 days, I will have to rekey those.  Of my 80 or so holdings, I am only entering 45 to sell with Stop Loss orders .  I may bump those up in time, but the big holdings are what concern me.   I think Fidelity is now limiting the GTC orders to 90 days so they are not forever also.

I found a great video on Fidelity explaining how to understand and place stop-loss orders.  Watch it here:

Fidelity Article on How to Enter Stop Loss Orders

 
Should you consider a STOP LOSS order for your larger holdings?   If you consider the danger of the current market, I do think it is worthy of consideration.    In life, I have found that you normally don’t need insurance if you have it.   So, if you key in some stop loss orders and never use them, it is just insurance.   BUT, if the market takes a huge downturn, and it could happen, you will eliminate some of your loss.   

Think about it and read some other authors on the topic and discuss it with your broker.  Since we no longer pay commissions to buy and sell Stocks or ETFs, we can simply repurchase the sold items if it was done in just a market shakedown.   But if a catastrophic drop, I think you will be glad you did sell.  

I want to point out that all my investments are in ROTH IRAs so I do not have to consider the short term or long term capital gains.   Be aware that in a non-Retirement account, the capital gains may cause you some real tax problems.
 
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The Path to Investing Using ETFs

DISCLAIMER -  I am not a Financial Advisor and do not work for any Brokerage Firm. The opinions given are of my own and are not to be used as professional advice.  These are my findings and can hopefully help you to make informed decisions on investing.  Consult a Broker or Lawyer before making any investment. 
 
Learning how to invest is sometimes a scary thing to many people.   If you are young (or old) and have never invested before, determining where to start is difficult.  I remember opening my first investment account back in 1973 at Merrill Lynch. 

I was the tender age of 22 and thought I was ready to get started.  Immediately I realized that Investment houses and stock brokers talked a whole different language than I did.   I was blessed to have a good broker, and he bought me a copy of “The Intelligent Investor” by Benjamin Graham and suggested I read it.   

It has been years since I read it, so I have not done a book review on it. In the book, Mr. Graham spends a lot of time explaining how to read company financial statements and how a person should try to buy a company’s stock when its price is less than their Net Asset Value.   

Probably just reading that one paragraph is enough to make many of you want to stop reading.  But hang in there with me. If you have a background in finance or accounting, this will make more sense.  But if you know nothing about accounting and financial statements, there are still plenty of ways for you to invest.

In two of my earliest articles, I tried to explain the 4 main vehicles that are used to invest.  They include Stocks, Bonds, ETFs (Exchange Traded Funds), and Mutual Funds.  Now there are many other ways to invest than these, but these four make up a large segment of the stock market financial opportunities.  

To read about Stocks, ETFs, and Mutual funds, read here:
STOCKS, ETFS, and MUTUAL FUNDS

To Read about Bonds, read this article:  What is a bond.

Today I want to discuss ETFs in a bit more detail.   An Exchange Traded Fund is much like a stock.  With a Stock, you are effectively buying ownership into the company.  Say you like buying at COSTCO discount stores, you might go down and buy a few shares of that company’s stock.  When you buy 10 shares, you become a minor partner in owning Costco.  If they pay dividends, each quarter (or yearly), you will receive a dividend check.   I don’t own Costco, but I own Walmart and McDonald’s.  

Both of these companies pay like 3% dividends, so if the stock was $20 per share, you would receive $6 per year in quarterly dividends for each stock share you owned.  So if you owned 100 shares, you would receive $600.  And on top of that, if the stock goes up in price when you sell your shares, you will have a capital gain from the difference.  

To prevent having to pay capital gains taxes, you can invest in an IRA (Traditional or Roth), and you never have to pay taxes on the gains in the ROTH IRA, and only pay them on the traditional IRA when you withdraw funds.  But IRAs are good ways to invest money.   Read about Both Types of IRAs

My wife and I both started off with Traditional IRAs, but have converted all of them to ROTH IRA’s so we never have to pay taxes on any money withdrawn.  When you put money into a ROTH IRA, you get no tax break.  But the biggest break of all is all that money comes back to you tax free when you retire or need it.

So the $600 of dividends which is Passive Income (money you did not have to work for), comes in and that is great. But say your $20 stock goes down to $15.  Until you sell it, you have lost no money. 

But if you needed the money for an emergency, then you would have lost 25% of your investment.  It is best to never buy stocks without a large cash emergency fund so that you can ride out the ups and downs of the market.

If you are like me, the idea of losing 25% of my investment is scary.  What if there was a way to minimize that loss?   There are MANY ways, but we are going to zero in on one of the best.   Don’t buy that one stock, but buy an ETF.  The ETF is based on some index or sector type.   There are 11 different sectors to invest in.
 
List of 11 Sectors
1.        Energy
2.      Materials
3.      Industrials
4.      Utilities
5.      Healthcare
6.      Financials
7.       Consumer Discretionary
8.     Consumer Staples
9.      Information Technology
10.   Communication Services
11.     Real Estate

ETFs are available over any one of those sectors, and then they can get very specific.   This is just one type of industry inside Sector 2 above (Materials).  SLV is all the silver companies.   There is one on GOLD which is GLD. (SPDR GOLD SHARES).

So a person can identify what they want to invest in, and suddenly you are no longer at the whim of any one stock.  However, you may not reap the higher dividends of specific stock selection, but you are going to get a very consistent average over that sector/group you have chosen. 

If your goal is to invest in DGI stocks, you can still use ETFs.   I believe that DGI stocks and REIT (Real Estate Investment Trusts) are the two most promising of all the types of investments available today. 

DGI stands for Dividend Growth Stocks.  A few ETFs that specialize in those are:  NOBL   FDVV  SDIV DHS and my favorite LVHD.  Another great ETF for DGI investing is PFF, I-Shares Preferred Stock Income Sectors.  Preferred stocks are some of the better investments when given proper scrutiny.  We will cover those in an upcoming article.

If you buy any of those ETFs, you are getting a broad range of Dividend Growth Stocks.  Will they give you an exact percentage each month?  No, but it is an average of all the stocks these companies chose to include in their portfolios.     So each of these ETFs will provide varied returns.  

Why I like LVHD the most is in this year with the S&P 500 falling this ETF is still making money.  That is a tough thing to do.  The others have done well, but LVHD is very, very good.

How can you buy an ETF?   Well, you have to use a brokerage firm or some app that allows you to purchase the ETFs. 

Now be aware if you purchase the ETF outside of an IRA, then you will have to pay taxes on both the dividends and the capital gains as the stocks appreciate in value.  I do 99% of my investing inside of ROTH IRAs so I never have to pay any taxes on the dividends or the capital gains.

What is super about ETFs is they constantly change in value throughout the day, and they are totally liquid.   What I mean by that is that you can buy or sell them at any time the market is open. So if you need your money, they can be sold by simply opening your browser or app and issuing a transaction to SELL.  

Of course, it all depends on the market as to whether you will make or lose money.  I have never used ETFs to do short-term trades.  Some people do and some ETFs are designed for that purpose giving 2 or 3 times a certain category in movement. 
 
So say you have 3x Energy ETF, it will go up or down 3 times as great as the underlying sector moves.   So you can make huge profits or lose it all very quickly. 

I don’t believe in day trading myself, and do all my investments as long-term investments.  That means I don’t try to time the market or move in and out of stocks or ETFs, but continually purchase more.   If I see some sector going down with no good outlook, I may sell out that ETF.  But on the larger sectors like the FULL Stock Market ETFs like ITOT, VTI, DIA, and SCHB, I simply continue to buy even more on market dips.

You have to get in and get your feet wet to find out what works for you.  If you are unsure of what to buy, discuss it with your broker, accountant, or lawyer.  All of the ETFs I have mentioned today are very consistent performers, especially in good markets.     

I urge you to study and read a lot of resources.   I feel comfortable investing today as I have a feel for the market after years of study and some struggles.   I have no crystal ball and can not tell you if the market is going up or down.    Being as high as it is now, it may very well have a huge downturn in the upcoming year.    But putting some money in ETFs in a ROTH IRA is a very logical way to get some passive income.
 
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Winners Never Cheat by Jon M. Huntsman

DISCLAIMER -  I am not a Financial Advisor and do not work for any Brokerage Firm. The opinions given are my own and are not to be used as professional advice.  These are my findings and can hopefully help you to make informed decisions on investing.  Consult a Broker or Lawyer before making any investment. 

 
Winners Never Cheat By Jon M. Huntman is a great great book.  I am still so happy this one was recommended to me by Patrick Bet-David.  If you think old style morals and living a principled life is no longer happening, you definitely need to read this book.  

Winners Never Cheat is a super book in regards to business success, and I would rate this the best book I have read on business success.   For years I have lived a principled life and God has greatly blessed me.   The Huntsman Brothers are proof again that great things await those that live right.
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In the year 2022, I read a total of 90 books.   I am ahead of that count in 2023 with 82 books completed in this first week of November 2023.   My goal is to try and reach 100 in 2023.

I started reading only about investments, then branched out into business success.   This led me to study Mindset and Habits.   All of these things interweave together in life.   To be successful in business (or life) requires discipline and the right mindset.  Jon M. Huntsman ws trained as a child to have great discipline.

Personally, I had never heard of Jon Huntsman before reading this book.   It was recommended in the book Your Next Five Moves which I reviewed below:

Your Next Five Moves 

WHAT I LEARNED FROM WINNERS NEVER CHEAT.

Jon Huntsman and his brother started Huntsman Chemicals in 1970 as a  family run business.   The company has grown and evolved into a 2 billion dollar a year revenue successful corporation.

Huntsman Chemicals have made many products including the first plastic egg container, plastic forks and spoons, and the original Big Mac container.
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Through the years, they have worked dozens of business deals ranging into hundreds of millions of dollars using a simple handshake to close the deal.  They consider the Huntsman Cancer Institute as one of their greatest philanthropic accomplishments. Jon Huntsman believes one day that they will find a cure for cancer.  Many of Jon’s family members died of cancer, and he has overcome 3 bouts of cancer in his life.

This book is much more than a story about running a business successfully.  The original book was published in 2004 but this revision was published in 2007 when the housing crisis and other issues seemed to make traditional values no longer in vogue.

The Huntsman Brothers believe to reap an abundant harvest can only be done by being responsible, never cheating, or using any fraudulent behavior. Jon Huntsman states that more is learned in times of adversity than in good times.
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Prosperous times never mean that a person will continue to do right.

Whatever our lot, we must have a fixed code of ethics to adhere to in both good and bad times.  Always stand upright regardless of the consequences. They believe all we really need to be successful we learned as children in the sandbox.   Fair play and being kind one to another is what life is all about.   Treating others with respect and making decisions without having a room full of lawyers looking for contract loopholes.   Always be honest and stay far from greed or dishonesty.

No matter our background, each of us really knows in our hearts what is right and what is wrong.  There is no place in business (or in our personal lives) to look for gray areas that the lawyers live to promote.
 
Huntsman Business Standards Tests

1. Do what you’re supposed to when you are told to do it
2. Kindness and honesty determine your heart and character.
3. Never tell lies.
4. Treat others as your desire to be treated (The Golden Rule)
5. Play by the rules
6. Respect others.

 
Character is most determined by a person’s integrity and courage.   Your reputation is how others perceive you.  Character is how you act when no one is watching.

Jon Huntsman makes a point to never lie or mislead in business negotiations.  He is a tough negotiator, which is fine, but do the business deals honestly and above board.   Keep both hands on the table with your sleeves rolled up.

Three R’s of Leadership

1.  Risk – You must take risks to grow.
2.  Responsibility – If worth doing, do it right.   Be honest and humble.
3.  Reliability – Above all things, do what you say.  Your word should always be your bond.  Use determination and courage to accomplish all things.

​He quotes Andrew Jackson who once said:  One man with courage makes a majority.

No matter what, always keep your word.   To do this takes great resolve.

In selecting advisors, be extra cautious.  Be sure they share your core values and are not wrapped up in acquiring wealth.   Money should never be your main focus.   Be sure in tough times that your advisors will default to higher ground when in times of stress.
 
Show graciousness to competitors, customers, and employees.  Showing respect never goes out of style. Whatever successes we receive in life we should give back.   Jon Huntsman received a scholarship to go to Wharton College of Business.  This gave him his start, and since gaining success, he has given hundreds of scholarships to deserving young men and women.    He believes in philanthropy so much that when the business has been slow, he has borrowed money to continue to fund his charitable giving.    When you make a promise, don’t break it is his philosophy.

Take your values to work and never allow a conflict between making a profit and adhering to your life principles of decency and fairness.

At the end of the book, he lists some F’s to practice and put first.

Family
Faith
Fortitude
Fairness
Fidelity
Friendship.
 
On the wall of his friend and doctor John Andrew Holmes is a plaque.  It says:  No exercise is better for the the human heart than reaching down and lifting up another.

The Huntsman Brothers have lived a life of reaching down and helping people all around the world.
 
Is this book worth reading?   For sure it is.   One of the best books on business and life I have ever read.  It will really inspire you to live a life of character and to never compromise your core values.   Winners Never Cheat.
 
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