Make Any Investment Risk “Free” in One Move
Readers ask me all the time if I can recommend an investment that is 100% risk free.
I can’t do that. There is no such thing.
(If anyone tries to tell you otherwise, take your money and run!)
That said, there is one way you can make any investment risk “free” under the right set of circumstances, by using one of my favorite Total Wealth tactics: the free trade.
We’ve talked about this before, and many of you got a chance to put it into practice with our Human Augmentation target, Ekso Bionics Holdings Inc. (OTC:EKSO) – simultaneously doing three things in the process: capturing profits of at least 100%, paying for your initial investment and reducing the risk on your remaining position to almost nothing.
Now, with the markets at new record highs and Greece machinations threatening to cause major corrections in world markets, I want to revisit that tactic. That’s because many investors are sitting on solid profits and, in doing so, unwittingly taking on a lot more risk than they should.
Do this instead…
The concept of a “risk free” investment is not new. The allure of risking nothing and gaining everything has been around for centuries. And, as you might suspect, it’s almost never ended well.
Case in point…
…the Tulip Bulb Crisis of 1634-1637
…the South Sea Bubble of 1711
…the Florida Real Estate Crash of 1926
…Bernie Madoff’s Ponzi scheme
So why is it that you hear the term in widespread use today?
Because Wall Street only associates risk with loss.
That’s why they consider U.S. Treasuries and other government paper as “risk free” choices, even though they know full well that there are risks inherent in every investment. It’s a game of semantics.
It’s a game, incidentally, that they want you to play, because it forces you to implicitly buy off on the most profitable strategy of all (for them) – diversification.
That’s the idea that if you spread your risk around in different asset classes and investments – like stocks, bonds, cash, real estate, and the like – you’ll be better off. The thinking is that not everything can possibly go down at once.
It’s been around a while. In fact, the theory was first noted in the book of Ecclesiastes written around 935 B.C. It’s also mentioned in the Talmud. Even Shakespeare picked up on it in “The Merchant of Venice” hundreds of years ago.
But it’s absolutely wrong.
Ask anybody who got their portfolio halved twice in the last 15 years – first during the Dot.bomb implosion from 2000-2003 and then the ongoing Financial Crisis that kicked off in 2008 with a vengeance. Everything went down at once both times.
And it’s not just me who thinks so either. Warren Buffett notably quipped that diversification “makes very little sense for those who know what they are doing.”
I believe you’ve got to think about risk differently in today’s highly computerized and interlinked global markets, especially when it comes to your winners.
My logic isn’t sophisticated. Put simply, nobody ever went broke taking profits but plenty of people have gone broke taking losses. So it not only makes sense to concentrate your assets using appropriate risk management but also to harvest your winners when the markets are strong. That way you’ll have opportunity at hand rather than being forced to run for the hills when the markets are weak.
It doesn’t matter whether you’ve got a lot of money or just a little, the principles driving our discussion today are exactly the same:
- You want to capture profits every chance you get; and,
- You want to take risk off the table at every opportunity.
Preferably, both at the same time.
Here’s a Real-Life Example of How This Works
I recommended Raytheon Co. (NYSE:RTN) to my Money Map Report subscribers in August 2011 because it was closely tied into two of our most important Unstoppable Trends – Technology and War, Terrorism & Ugliness. It was trading at $46.05 a share then.
By November 2013, the company’s stock had risen to $85.19, and dividend payouts had reduced the cost basis to $42.51, so subscribers who followed along as directed were sitting on returns of at least 100%. In keeping with what I’ve just explained, I recommended selling half the position to capture profits and redeploy into subsequent recommendations. I also suggested that they let the remaining shares run.
Pro traders call this a “free trade,” because you not only get back your original investment, but you maintain all the upside you can handle, essentially “for free.” Even better, because you’ve now “paid” for your investment, you can stay in the game with not an additional dollar at risk… even if the stock you’ve just harvested has a sudden reversal in fortune and goes from hero to zero.
The advantages were as clear then as they are now.
By capturing profits when we had the chance, subscribers ensured that their focus was on winning and on new opportunity, exactly as a savvy investor should.
As part of that move – selling half their RTN shares – subscribers were left with a remaining position in Raytheon that could literally go to zero and they wouldn’t lose money. Obviously, that’s a very unlikely outcome for such a major player. (And I’ll show you how the trade turned out in just a moment…)
So while it’s not literally “risk free,” I would argue that it’s as close as you can get to the term’s true meaning.
What I like about this most is that a free trade works in all market conditions, on any investment, and can be set up well in advance. That means you don’t have to be planted by your computer nor be an aggressive day-trader to make it work.
No other technique I know of comes close in terms of simplicity or effectiveness.
You know exactly what price is required to harvest your gains – and remove your risk – in advance. In fact, you can set up your order to sell half of your investment for at least a 100% gain the moment you buy a stock you’re interested in. Or any investment for that matter.
Contrary to what a lot of people think, the “free trade” is not about reducing potential at all when it’s properly executed. That’s because you can then take the money you’ve pulled out of a free trade and immediately lateral it into another opportunity while letting the rest ride.
So How Did The Raytheon “Free Trade” Work Out?
The stock closed yesterday at $108.07. Meanwhile, after collecting more dividends, subscribers’ cost basis is now down to $41.24 per share. So they capture at least 100% on the first half of the position and are still sitting on a 158.34% gain on the other half – risk “free.”
Meanwhile, they’ve had the opportunity to put the money they pulled out of Raytheon into subsequent recommendations… 11 of which are approaching the 100% returns we need to repeat the process all over again.
Imagine how fast your money will grow if you do this once, twice, three times or more – all from a single risk management tactic used at the right time.
And all because you’re using profits the markets want to hand you.
Best regards for great investing,