Analyzing Risk vs. Reward (September 24, 2016)

investor-psychology-cycle-102313-2

The first rule of Fight Club is… Oh wait, sorry, I meant — The first rule of investing is?

“Buy low and sell high”

Everyone knows it, and hardly anyone ever does it…

But what is the point of that rule?

Risk vs. Reward.

To illustrate, I present to you, the S&P 500 (and conclude what I think is probably the best course of action over the long-term).

spy_spx_ixic_dja_chart

2009 = Buy

2016 = Sell

I hope the arrows and colors help highlight things clearly…

What are the majority of investors doing? Why, buying more shares of the S&P 500 (and dividend growth stocks), of course!

Investor psychology at market tops:

  • What is at all-time highs can only climb higher! The party will never end! Happy Days are here to stay! This time it’s different, for sure!

 

Now, let’s flip the script…

 

To illustrate, I present to you the Global X Uranium ETF (URA) (and conclude what I think is probably the best course of action over the long-term).

ura_chart

2011 = Sell

2016 = Buy

I hope the arrows and colors help highlight things clearly…

What are the majority of investors doing? Why, NOT buying more shares of URA, of course!

Investor psychology at market bottoms:

  • What is at all-time lows can only fall further! The misery will never end! The Depths of Despair are here to stay! This time it’s different, for sure!

 

News flash — The S&P 500 is not going obsolete… and neither is uranium… Over the long-term, all asset classes move up and down, like sine waves…

 

Can the S&P 500 soar even higher? Absolutely it can…

Can URA (and other uranium stocks) crash even lower? Absolutely it (they) can…

 

Risk vs. Reward…

 

“Buy low and sell high”

 

How come most investors can’t grasp this most basic concept?!?

 

And no, I’m absolutely NOT suggesting that anyone out there should make any immediate, rash decisions with their own portfolio… As I have emphasized in so many of my articles — The world is not black and white.

 

Here are some “shades of grey”…

  • Stop buying shares of the S&P 500.
  • Sell “some” shares of the S&P 500 to lower your cost basis. Book “some” profits.

 

  • Add uranium stocks and URA to your “watchlist”. This doesn’t cost you anything to do…
  • Buy just “some” shares of URA. A small tranche here, a small tranche there… Give it time and let the macro story play out before you “back up the truck” with full conviction.

 

As always, please do your own due diligence and research before doing ANYTHING!

 

But in life, there’s usually a happy compromise somewhere to be found between two extremes…

 

Fight On!

 

Photo Credit: STAWEALTH.COM

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JohnFI FighterMy Dividend Pipeline Recent comment authors
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FI Fighter,

Your top chart is precisely the reason, the Vanguard 500 index fund outperforms most managed funds. Those series of emotions is why I try to make purchases during all cycles, knowing that nothing good or bad lasts forever!

MDP

John
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John

Jay, a fellow Bay Area tech guy so I want to play the devil’s advocate.

Given that you are bearish and expect Stock and real estate markets to get lower; would you not expect UUUU or URA to also go lower when that happens? What would be the advantage of buying now?

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