As part of Global Intelligence, I have put together a list of “Investment Types.” This is a five-step scale ranging from “Like Cash” to “Venture Investing.”
You don’t need to invest in every opportunity I bring you. My goal is to find unique opportunities across all risk profiles. Knowing the risk associated with a particular investment can help you pick and choose the ones you feel most comfortable owning.
So, on to the Investment Types and what they mean…
Like Cash: These are investments that have very low volatility, and generally low risk. They’re similar to having cash in a bank account, though they can fluctuate in value. For the most part, these will be currency investments.
Stop/Exit: Generally, we won’t use stop-losses here since the volatility is so minimal.
Lower Risk: Safer investments recommended for all investors. In the old parlance of Wall Street, these are “widow and orphan” stocks that aren’t very likely to fall out of bed or collapse.
Stop/Exit: We will always set a trailing stop-loss at 20%. If a lower-risk investment has fallen 25%, then it’s because the broader markets are collapsing and taking down everything, or a business/industry issue has suddenly degraded a company’s financials.
Medium Risk: These are basic, blue-chip stocks like a Walmart or a Coca-Cola. They certainly have broader market risk, or broader currency risk if they’re foreign securities. So, they can fall in value. But similar to the Lower Risk category, these investments are intended for pretty much all investors.
Stop/Exit: We will always set a trailing stop-loss at 35%.
Higher Risk: These are stocks that are either volatile in nature, or which have financial issues that present challenges in the wrong economic environment. They are higher reward, and generally selected for a specific investment theme unfolding, but they demand that you accept the possibility of bigger losses. As such, they are only for investors who can tolerate the risk of a sizable loss.
Stop/Exit: We will always set a trailing stop loss at 55%.
Venture Investing: This is basically for cryptocurrency plays. These investments are going to rise and fall with great volatility, so you need to be prepared for that. Of course, that volatility comes with the potential for very large gains. With these investments, never risk more than 5% of your entire portfolio.
Stop/Exit: Generally, we won’t use stop-losses here since the volatility is so high. The risk is we set a stop-loss that the investment hits during a period of extreme volatility, only to see the investment rebound quickly. With these investment types, I will monitor them and alert you to any trades.
Note: Where appropriate, I will also include an “Income” qualifier to let you know that we’re making a particular investment to chase a yield of some kind. This could be its own category, but there are income plays across a variety of Investment Types. So, I would rather use “Income” as a descriptive qualifier to help you understand the income opportunity relative to the overarching risk of the investment itself.
How Stop-Losses Work
A stop-loss is simply an electronic order that tells your brokerage firm to sell a stock at a set price in the event that the stock declines. We are using what are called “trailing stop-loss” orders.
A trailing stop-loss is a sell order that trails the stock price higher. So, for instance, if you set a 30% trailing stop when a stock price is at $100, the order would execute if the stock slips to $70. If the shares rise to $120, the stop-loss would automatically rise to $84.
Note that you are not guaranteed to receive that price. If a stock price “gaps down” below your set price, you will receive the lower price. (Gapping down refers to when a stock opens at a lower level than the previous day’s low.)
Setting a trailing stop-loss is easy. Most brokerage firms have a “trailing stop-loss” order prebuilt into their “Trade” options. So, you just:
- Log into your account.
- Select the stock you own.
- Click “Trade.”
- Select “Trailing Stop Loss (%)” from the list of Order Types.
- Choose the % amount.
- Click “Based on Last” (meaning the last price a stock hit).
- Select “Time in Force” and choose “Good ‘til Cancelled.”
- “Preview Order,” and then approve the trade.
You’re trailing stop-loss is set. If a stock falls out of bed for whatever reason, your order will automatically execute, even if you’re not paying attention to the market at that exact moment.
How to Protect Your Portfolio
I noted above in Venture Investing not to put more than 5% of your portfolio into that category. I just want to be clear that I don’t mean 5% of all your money. I mean 5% of the money you have allocated to investing, not savings.
It’s very hard to generalize here because everyone has a different mentality, a different tolerance for risk, and a different emotional reaction to profits—and especially—losses. I am OK with a good deal of risk in stocks and crypto because I have a sizeable retirement account that is more than 75% in Swiss francs, gold, and inflation-protection bonds. That safety net colors how I think about potential losses.
Not everyone has that.
Moreover, age plays a factor here. The older you are, the less risky you want to be. Don’t try to make up for a smaller nest egg by hoping to shoot the lights out with crypto, NFTs, or risky stock plays. You might very well succeed…or you might lose and be in a worse position.
I would counsel anyone to have at least 40% of their portfolio in a safe, non-dollar currency like the Swiss franc, and in bonds (particularly those that protect against inflation like U.S. Treasury Series I bonds).
Of the remaining 60%, most of that should be in high-quality blue-chips and income-oriented stocks, such as certain real estate investment trusts or Canadian royalty trusts.
I would allocate around one-quarter of that 60% (so 15%) for investments in Higher Risk and Venture Investing opportunities…and I would spread that around to multiple opportunities.
Because the gains are so potentially large, the payoff is asymmetrical to the risk. You’re putting up a little bit of money to potentially gain a lot.
If you fail, the pain of losing a tiny bit of your overall portfolio won’t be so bad. But winning big here means far outpacing whatever losses you’ve had, and it means you can use some of those winnings to: A) funnel into blue-chip/income plays, and B) fund additional Higher Risk and Venture Investing opportunities.
