The Capital Retention and Multi-Generational Wealth Connection
Time has shown the common-most ‘top priority’ among elite investors globally has nothing to do with buying securities or building investment portfolios, and everything to do with the protection of capital and knowing when to sell. Mountaineers ascending grades too steep to arrest a ‘slip-n-fall’ often attach to a fixed rope, so when things go wrong they can live to climb another day. While numerous and varied investment strategies prove successful at increasing investment values, retaining capital when things go wrong is the single indispensable factor in surviving to invest another day. Mark Twain went bankrupt late in life by doubling down on failed ventures instead of abandoning them, learning by mistake the critical importance of the ‘exit plan’ to the multi-generational retention of capital wealth.
I was fascinated by a recent webinar in which three profoundly successful investors each shared their very different approaches to investing, the systems being so dissimilar apologies were offered at every exchange to temper strongly held but opposing views! Yet the one commonly practiced principle by the three was to have an ‘exit plan’ for every equity ‘trade’ at the time of purchase. What is an ‘exit plan’, how do the basic strategies work, and which are right for you?
Wall Street promotes the idea “time in the market”, not “timing the market”, is what produces reliable and lasting wealth, but Wall Street profits on the widely-held belief, and offers no comfort to the casualty investor when the delusion recurrently vaporizes. Here are some key practices that will save you from becoming a statistic:
A ‘Forever Stock’ holding involves the purchase of capital efficient, industry-dominating, dividend-paying, dividend-increasing companies at attractive valuations. All other stock purchases constitute a trade, and all trades must involve an exit plan Day 1.
Never fall in love with a holding of any kind. If you don’t understand this principle, read the book of Hosea. Nothing in this world is worthy of your confidence but GOD alone.
Run with your winners and cut your losers. Appreciating stocks tend to continue appreciating, and vice-versa. Give leash to your winners and maintain a cold and distasteful low tolerance for losers.
Take a ‘free ride’ on every 100% winner by promptly removing the original investment amount. Never make an exception to this rule.
Investigate and use Stop-loss orders on all equity trades, stocks, ETF’s and mutual funds alike, or make sure the person managing your critical retirement capital is doing so on your behalf, at all times and with strict discipline.
Never trust your personal insight or instinct to tell you when to sell. The counter-intuitive stock market, coupled with your vulnerable emotions, will betray and punish you ruthlessly.
Enjoy, and be thankful for the financial freedom these principles will afford you, and teach them to your children.
Think about it, Shaun.
“In all toil there is profit, but mere talk tends only to poverty” ~Proverbs 14:23
“The sluggard does not plow in autumn; he will seek at harvest and have nothing.” ~Proverbs 20:4
“The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty” ~Proverbs 21:5
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.