Five Total Wealth Principles to Use Today (and Every Day from Now On)

Keith Fitz-Gerald Apr 08, 2015
28 

I’ve talked to thousands of investors over the years who are absolutely convinced that they need to understand the market’s most complicated nuances to get ahead.

In reality, though, success comes down to just five things that I call the Total Wealth Principles.

Get ’em right and you can make more money with less risk while enjoying a peace of mind that the vast majority of investors will never have. I know that sounds like a tall order, but it’s not. Or, at least, it doesn’t have to be.

You see, most investors fight the markets instead of going with the flow. And in doing so, they doom themselves to pathetic returns that do nothing but pad Wall Street’s pockets.

I want you to understand these five Total Wealth Principles because they will help you harness the awesome power of the markets themselves. Then you’ll have the perspective needed to build the financial future and, specifically, the profit potential, that you so richly deserve.

Especially now, when weak economic data is building yet another wave of panic among the 99% of investors who will never understand what I’m about to share with you.

Here are five Total Wealth principles to invest by – and pitfalls to avoid.

Total Wealth Principle No. 1: Think Long-Term to Harness the Markets’ Incredible Upward Bias

I often joke during my presentations around the world that we are all born with common sense… and that it’s just bred out of us as adults. Usually that gets a good laugh, especially since we’ve all touched the proverbial “hot stove” at one point or another in our lives despite knowing better.

Nowhere is that more clear than when it comes to money.

That’s why investors assume that whatever is happening right now is going to happen in the future. It’s also why millions try to find patterns in random data that they believe are meaningful, while ignoring the information that actually means something.

Case in point: history. Data show very clearly that the markets have a tremendous upside bias over time. There are all kinds of reasons, but really it comes down to the fact that there is a constantly increasingly supply of money chasing a finite number of stocks. So prices increase.

If this doesn’t make sense, think of it by imagining eggs at the grocery store. If there are 1,000 eggs and only one shopper, the price of those eggs will be pretty darn low. But if the situation is reversed and there are 1,000 people who want the last egg, the price will go through the roof.

So why is it that investors panic and do exactly the opposite of what they should be doing?

Simple… because they don’t understand what I’m telling you: namely, that capital is an expansive force. By its very nature, capital ties into the growth of the companies that make up today’s markets. Growth translates into revenue, revenue to earnings, and, ultimately, earnings into higher share prices.

Ergo, bear markets are not the excuse to run for the hills that everybody thinks they are. They’re nothing more than a short-term event that does not mitigate the larger, longer-term picture.

I realize that runs counter to conventional wisdom, but hear me out.

Even the dot-bomb blowout and the Financial Crisis of 2008 are nothing more than speedbumps in the grand scheme of things. In fact, if you had bought a fund tracking the S&P 500 on July 1, 2007 – the point at which it reached an all-time high before the Financial Crisis began – and held those shares, you’d still be sitting on total returns of more than 31% today.

Source: Yahoo!Finance

To be clear, I’m not advocating “buy and hold.” What I am trying to demonstrate is that you can buy at an absolute peak and still have double digit potential if you have the right perspective. Buy and “manage” is always a better way to go… but that’s another Total Wealth Tactic for another time.

I want you to understand that periodic downturns are a fact of life. More to the point, bear markets are normal because what they really signify is opportunity in the bigger picture.

Buy low and sell high is how the game is most profitably played – especially when you confine your investments to growing companies in Unstoppable Trends like we do.

Total Wealth Principle No. 2: Be Mindful of Markets’ “Reversion to the Mean”

The second involves a concept called Mean Reversion.

Mean Reversion (in financial terms) states that stocks have an average rate of return, or movement, that they will deviate from and then return to over time.

For example, if stock ABC has historically returned 7% on average over the last 50 years, but it returns 15% this year, traders can reasonably – though not always – expect the stock’s price to record smaller-than-average growth the following year, to bring its growth for that period more in line with its mean return.

Of course, sometimes companies see “game changers” that enable the stock to see improved returns that are not just sudden, but sustainable. That means stocks can experience Β a breakout (Tesla in 2012, Jazz Pharmaceuticals in 2009) from which there is no reversion to the old mean – merely the establishment of a new one.

Of course, this works in reverse, too. Stocks can see death blows that result in an unrecoverable decline. Like RadioShack, Blackberry, or even Kodak, for instance.

My point is that understanding whether you are above or below the trend line can tell you a lot about whether short-term market conditions favor buying or selling.

If you’re significantly above trend, the markets favor a retracement lower. If you’re below trend, an upward move.

It all comes down to perspective.

Speaking of which…

Total Wealth Principle No.3: Beware of the Market Timers

Understanding the historical returns of the markets and having a good understanding of whether a correction or bull run is likely should never be confused with market timing.

People who try to time the market – buying when they think the market has hit a nadir, or selling when they have a feeling it won’t get any higher – are wrong a staggering percentage of the time.

Nobel Laureate William Sharpe observed in a 1975 study that a market-timer would have to be correct 74% of the time to outperform a simple index fund. SEI Corporation updated Sharpe’s work in 1992 with a much longer time frame, dating from 1901 to 1992, and found that timers would have to be right a staggering 91% of the time.

But that doesn’t stop people from trying and, I might add, with predictable results. It’s no coincidence that DALBAR data shows that the average investor who tried to time the markets achieved an annualized return of just 2.53% for the 20 years from 1993 to 2013, in contrast with the average annual return of 9.02% that the markets generated over the same time frame.

The bottom line?

People tend to overestimate their ability to predict where the market will be heading, so they make knee-jerk decisions based on how they feel about things instead of using cold, hard logic to guide their behavior.

Get emotion out of the equation, quit trying to time things, and you’ll be miles ahead of the herd.

Total Wealth Principle No. 4: Understand Volatility – and “Black Swan” Events That Shape It

Very few investors understand that volatility has a “shape,” and an extremely specific one at that.

Prior to the financial crisis, volatility was modelled around an equal set of expectations using standard distribution models taught in every high school statistics class.

Most commonly used for options, the price models are commonly depicted as a “volatility smile” that shows you the relationship between volatility and price.

While a complete discussion is beyond what we can do here in a single column, what you need to know is that as volatility rises, options prices rise along with it. In the old days it was a relatively evenly distributed relationship, as you see above.

However, since October 19, 1987 – a day traders refer to as Black Monday – when stock markets around the world crashed and the Dow lost nearly 22% in a single day, there’s been a change.

That’s because the markets are now viewed as having very small but permanent odds of a catastrophic failure. This is known as “skew,” and makes buying protection more expensive than it theoretically should be, and makes buying upside cheaper than it appears.

Imagine the “volatility” smile turned a bit, and you’ll get what I am talking about.

Figure 1: Safehaven.com

This is important even if you don’t trade options.

That’s because the skew is indicating that prices can get out of control on any downward move faster, and the move itself can be more violent, compared to similar downside moves before 1987.

So, you’ve always got to have a risk management plan in place ahead of time.

To me that means some combination of 1) only picking the best stocks following unstoppable trends, 2) having trailing stops in place at all times and 3) keeping risk to razor-thin levels. The stuff we walk about all the time here at Total Wealth.

There are a number of reasons why this is the case, but much of it has to do with the increasing computerization and indexing most of the major trading houses engage in today, not to mention the interconnected nature of our financial markets.

Incidentally, that brings me to…

Total Wealth Principle No. 5: Trade with Wall Street’s Big Boys – Not Against Them

The machines are here. The percentage of trades in the U.S. that were made by algorithmic programs rose from 25% in 2004 to more than 50% by late 2009, according to Aite Group. Some estimates suggest as much as 70% of total stock market volume is now machine-driven, with the heaviest concentrations in the U.S. financial system.

Most investors believe this to be a disadvantage, but I disagree for the simple reason that you have advantages as an individual investor that big traders don’t.

For instance, you can move in and out of the markets, adjusting your positions at will in accordance with your specific profit objectives and risk tolerances. Big traders have no choice but to keep their money moving. So they’ve got to play games even if they don’t want to, and even if the markets are working against them.

If that’s hard to believe, think about it this way. You can buy or sell a few thousand shares of Microsoft and the markets won’t even notice. But an instructional trader can’t just waltz in and buy a few million shares without other traders noticing and beginning to trade against him.

This is why, for example, a JP Morgan trader named Bruno Iksil got sideways and cost the company at least $6.2 billion in 2012. Once competing traders heard he was in trouble, they began to bet against him and profited even as he lost.

That’s why I recommend using limit orders, trailing stops, and even options. It’s not that I want you to do anything crazy.

Just the opposite, actually.

I want you to understand the big picture, along with all the tools at your disposal, so you can protect yourself from Wall Street’s manipulation and beat them at their own game by exploiting trading conditions to your benefit… not theirs.

The way I see it, investing is a thinking game, and the more strategically you approach it the more successful you will be, especially if you keep these five Total Wealth principles in mind.

To that end, I’ll be back with a look at several of the most commonly used order types you can put to work immediately.

Until next time,

Keith Fitz-Gerald

28 Responses to Five Total Wealth Principles to Use Today (and Every Day from Now On)

  1. Brian says:

    Print this article and give it to your children!! It’s a ‘keeper.’

    • Keith says:

      Thanks for the kind words Brian!

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  2. Clint says:

    Your one of few analyst I sort of trust, and does this information apply equally for small caps as well as larger caps.

    • Keith says:

      Thank you Clint. I will do everything to ensure that trust is not misplaced. It is an honor and I appreciate your kinds words.

      Regarding small caps…yes – this logic applies equally to both. The volatility is obviously higher, but that does NOT invalidate any of these principles.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  3. Bill Wilson says:

    Very good.

  4. Robert in Vancouver says:

    The article tells us to use trailing stops. But because of sharp dips in the market caused by computer crashes or a bad news day, you will get stopped out of good stocks only to see them go back up the next day or two.

    I find it better to buy and hold dividend paying stocks/funds that pay you to hang on during dips in the market. Some guy named Buffet does this, and he seems to be doing pretty good.

    • Keith says:

      Hi Robert.

      Some guy named Buffett…indeed! Love your wit.

      You raise an important point and an important distinction. You can use buying at a deep discount and reinvestment to offset some of the “risk” that comes with trailing stops for exactly the reasons you outline. Options and inverse funds are terrific alternatives, too.

      Seems to me there’s an article in here somewhere. Stay tuned.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  5. John Kolin says:

    Thanks. Very good information!

    • Keith says:

      You’re welcome John. Thanks for reading and for your kind words.

      Best regards and thanks, too, for being part of the Total Wealth Family, Keith πŸ™‚

  6. Bob Braaton says:

    Keith,
    Thank you for your succinct and sound analysis of the Total Wealth principles. I plan to use them in my investment strategy. I am an intelligent, but amateur investor and I am following all of you at Money Morning and like all of your approaches to investing. There is just one disconcerting thing…no one seems to be paying attention to the “800 pound gorilla” in the room.
    Scientists worldwide are in complete (and I mean complete) agreement that the climate crisis that has descended on us will have an enormous impact on all of human life and most importantly on our financial lives. Given that you are in the business of advising people on the factors that impact their investing, to ignore one of the most powerful factors seems foolish. For example, scientists have informed us that 80% of all the know coal, oil and gas reserves in the world must remain in the ground if humanity is to survive this crisis. Hyperbole? Maybe you should have a “climate” team that researches the impact of this crisis and gives you some much needed information on this factor.
    Just a thought.
    Bob Braaton

    • Kevin O says:

      All those scientists have formed a consensus on the theory of global warming. Consensus in not science which must be provable and repeatable. Although, the earth has been warming sense the end of the last ice age, it is only one of the many cycles of the earth we have little control over. Mostly affected by volcanic activity and that big bright ball in the sky. One large volcanic eruption spews more greenhouse gasses and soot than all the CO2 deposited by man sense the beginning of the industrial revolution. Satellite data shows no increase in global temperature in the last 15 years and the Antarctic ice shelf is larger than it was before Al Gore’s movie. However, all that aside, like the millions Al made, if we can make money on what people are afraid of, I’m in.

    • RJ says:

      The only 800 pound gorilla in the room is you.

      Scientists? Or shills for the climate change mafia?

      The so-called “deniers” — scientists and real climatologists with another perspective are being silenced and their livelihoods threatened by the CC mafia.

      Did you know that professor Robert Bryce, a good liberal, who taught your President at Harvard, is representing the nations largest coal company in a law suit against the EPA?

      Check it out, as well as his Congressional testimony, wherein he stated the Feds are “shredding the Constitution.”

      Perhaps you should invest in the Chicago “climate change fund” and trade carbon credits with Al Gore.

      Did you know that the fund was started with millions from a corporation that your President sat on the board of directors of?

      By the way, in what 100 year has the climate not changed?

      Were you taught in school that we had ice ages? Tell me, just how did the planet warm up when man and the internal combustion engine weren’t even on the earth?

    • Keith says:

      Good morning Bob.

      That’s a great observation and a reminder that I have not talked about climate change in a while. We’re actually following it as part of the Six Unstoppable Trends I outline in this article under allocation and demographics. I have an Ekso-like recommendation in the works, too.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  7. H. Craig Bradley says:

    MEAN REVERSION & BIOLOGY

    California’s current water shortages due to chronic droughts may be resolved through the market mechanism known as “reversion to the mean”. Wildlife Biology says every habitat has a given “carrying capacity”, that is, the population of whatever species that is sustainable in the long term with available resources ( food, cover, water, habitat).

    California may indeed depopulate in the next 20 years or even less because of a lack of essential habitat requirements. As millions of residents leave or die-off, habitat balance will eventually be restored and thus, the state population will come back inline with the natural habitat carrying capacity.

    Other ways to get there involve a number of “mortality factors” such as disease, starvation, war, riots, terrorism. Its nature in action. Nature shows no mercy, neither on the Sarangetti in Africa or the Central Valley in Calif. Watch it unfold on its own, as it must eventually, one way or the other. Its unstoppable.

    • Keith says:

      As always, Craig, you raise some really interesting points and perspective. I share your thinking that SoCal will revert after decades of abuse from overpopulation, drought and generally being mistreated in a variety of ways. It’s the ultimate human expression of arrogance to think that we can overcome Mother Nature.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  8. Arturo Lucero says:

    Thank you for sharing your experience and knowledge.

    • Keith says:

      You are extremely welcome, Arturo.

      Glad to have you here and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  9. Polo says:

    Excellent! I am in total agreement with you. Through my research I found out that the best way to play the stock market is exactly the same as to what you’re proposing. One of my favorite leaders in your field is is Van Tharp…

    I am about to embark in buying stocks full time staring in May. I am currently completing my research and the last component is deciding what system to use. Any ideas?

    Much appreciated

    Polo

    • Keith says:

      Thanks for the kind words, Polo. If I may be so bold, be leery of “systems” and instead concentrate on an approach like the one we use here in Total Wealth: 1) stick to Unstoppable Trends – everything else is just unwarranted risk; 2) pick your companies carefully with an emphasis on “must-haves” reflecting sound financials and outstanding potential, and; 3) watch risk like a hawk at all times.

      I’d love to learn more about your research some day. And, I agree, Van Tharp is a fabulous resource.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  10. Richard Di Lorenzo says:

    Hello Keith: About a year into listening to you. I appreciate your philosophy and sensible approach. I understand the LONG TERM benefit of stocks, but what about people who are older and are having to start withdrawing funds for personal expenses. We might not have as much time to re-coup a major downturn or slow market (1970’s) . Having stops in place at 25% below is a pretty big hit to take, particularly with tax consequences. Anyway, some of my concerns. One item, the emails that keep you a captive audience with no way to pause for completion later and so forth, are somewhat irritating, and I find myself turning them off, as I have no idea how long it will take to find out the whole story, or find out what the speaker wants us to do etc.

    • Keith says:

      Good morning Richard.

      Thanks for putting up with me for so long. I am thrilled you are here and appreciate your kind words.

      I’ve got some thoughts on the Long Term versus Short Term thing that I’ll be addressing in a future article. You raise an important point and one that matters a lot, especially now.

      As for the emails, let me talk with our email team and find out what I can do about a “pause” button.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  11. jerry warren says:

    This looks like very good advice, and will try to keep this principles in mind .

    • Keith says:

      Thanks Jerry. I actually keep a short list on yellow stickies attached to my monitors…that way I can’t get careless because the principles are always directly in front of me. Don’t know if that helps.

      Best regards and thanks for being part of the Total Wealth Family, Keith

  12. Frank Bresee says:

    Hi Keith,

    Many thanks for this; I always look forward to your articles.

    I am a senior with a very small portfolio (<200K) and a fixed income which makes it difficult to add large amounts of capitol. I believe I have a reasonable mix in my folio and I review the asset allocation once or twice a year. But every now and then I see something from you or Bill and I wonder if I should buy but that forces me to sell something. It is fairly easy to spot the losers but often I am faced with the only option of selling an equity that I have had for several years with reasonable increasing dividends but little growth. I wonder if you have a formula that would reveal important metrics pointing to the necessity for a review, and decision to hold or fold.

    With best regards,
    Frank L Bresee

  13. Doug Spencer says:

    Hi Keith:
    I agree w/ R DI Lorenzo re Every email being a too long series of often repetitive (re previous emails) “hooks” to sell yet another expensive service. Like F Besee, I’m a senior on a very limited budget – so much so that I can’t afford stock purchases. Instead of buying stocks, I’ve paid “full pop” for the Option Monster education. I’m also debilitated w/chronic joint problems from heredity and an an over-active career as a land surveyor/construction engineer.

    Upon calling to grumble re the “hooks” and the fact that the one year membership was not offered when I signed up, your team blew my mind! They refunded ALL the $79, sent me the book THE DEATH OF MONEY for FREE and still keep sending the emails.!

    To say I’m impressed is an understatement! I realize that there are so many, many offerings of “plans, methods & techniques” these days that the market for such services is over-saturated as never before. I totally agree with the TOTAL WEALTH principles and philosophy as outlined by you and your excellent team. When I’m up $20 – 30K from options and have secured sufficient options capital, I will then engage your sector services to begin my drive toward TOTAL WEALTH! I have the misfortune to live in one of the most expensive places in the USA and my wife will not leave Maui, so if Our Good Lord permits me the time, I’m locked on for the achievement of immense wealth using your principles! Thank you for an optimum consumer experience! Maui Doug

  14. james guzzi says:

    Keith,
    I have one daughter whom I adopted from Russia in 1993 and my only daughter. She will hopefully inherit what small legacy that I have. I have captured some whole life Insurances for her converted after retiring from the US Air Force. You really don’t have the odds in your favor to really save much during your years compared to others who had corporate careers and lived in high growth areas. I have never made anything in stocks but thru old fashion savings that was left over after 22 moves in a 20 year career. I don’t recommend it to get rich. Well the RedX to bail and the GreenX with high velocity to see returns (big ones), and “I get it” your brilliant system and have set my hopes to leave some extra to my daughter. She will need it in this heartless world. I don’t have that much and am older and not time to double down over any longer term. I have taken you on with great trust in you as an strategic thinker and investor with your understanding of the big picture and your proven stick to your guns brilliant investing practice. The down payment to get in was my biggest decision as I really cant lose it, but You and High Velocity Profits in these crazy times allowed me to go for it with confidence and sleep at night assurance.
    You hear of the looming currency crisis bigger more than the climate issues brought up by others and the downfall of the dollar and the looming market crash and I mean crash. Will your Red X pick up the velocity downdraft being percolated by the world economic system coupled with our 19T with a Trillion debt crisis to “see” the inevitable coming to RED X US ALL OUT BEFORE the end is near, or do we have some more room to make good on the Green X’s. What do we do with the currency in dollars when big banks too big to fail fail and the dollar over night is no longer the world accepted currency and we cant pay the debt interest! What good is the dollars being gained, in our savings, in stocks, in bonds, in property value in dollars that will sink too, if all the dollar denominated wealth assets are cut in half or even 75% or more? Is there hope here??
    Anyway, I am really positive about the great Nation bar no others on this Planet. I was called back into the Service as a Aerospace Engineer by Ronald Reagan out of the Corporate World and back into the Air Force. That has been my fate. I was put on the development Engineering Design Team for the C-17 Transport as Program Manager for Reliability and Maintainability for the whole System Design. I came through for this Country and am proud of it. I am not looking for a pat on the back, but am looking for some positive light at the end of this tunnel that we all are in. Do you see that in your view of the economic world that the RedX’s and GreenX’s are part of. We are not isolated or immune to instant changes here beyond our understanding, or the truth given to us by our Government. The C-17 is the most reliable airplane in the world today and has been our strategic workhorse. I developed a new management model that then McDonnell Douglas adopted to design in Reliability and it was super successful. You just can just look it up, but all the brilliant work by all of us cant stop a run-away train going out of control. I know and have faith in the future, but prepare of the worst case, and You Keith are the person we are relying on to prepare us for the best of financial opportunities in the worst of times and survive. I will ride this Train with you as the few lucky ones who have got on Board until you say get off.
    Jim Guzzi LtCol USAF Retired

  15. Pavit Kapoor says:

    Hello Keith,

    I read your articles and comments with great interest – your point of view and perspective are always refreshing.

    I am a Canadian investor, and, on a personal level would like to ask about banks. I personally don’t trust the US banks (please, US residents, don’t lynch me – it’s nothing personal!!) considering how they manipulated the markets before and during the 2008 financial crisis, stealing multi millions from average lunch pail investors.

    In your opinion, have the US banks rehabilitated themselves? Some experts say yes, others, no. Your colleague James Rickards has nothing good to say about them, and insists that many are still toxic.

    What about Canadian banks? They seem to have withstood the financial crisis quite well.

    Thanks

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