The Take Away
“Never put all your eggs into one basket” is a rule that has universal application. It applies to maintaining a diversified portfolio but more importantly, it applies to utilizing multiple investing strategies as well. All strategies will produces losses from time to time. By implementing multiple strategies you increase your odds of increasing profits and minimizing losses.
Taking advantage of ETFs that track underlying indexes, the investor can also instantly diversify a portfolio into a broad swath of stocks that each represent different market sectors. This has the added advantage of potentially reducing transaction costs since one buy or sell action is all that is required to open or close a position.
A rarely discussed type of diversification involves examining investments through the lens of economic cycles and their influence on the value of one’s assets. By better understanding these economic cycles, one will know the important underlying reasons for diversification across sectors and classes of potential investments. This leads to a more sophisticated approach to risk management and better portfolio performance over time.
Margin can practically multiply portfolio performance 2 times. But margin has unique risks associated with it, including interest costs that drag on that performance. Margin will also magnifying losses that could result in margin calls. Margin can and should be utilized but only when it is strategically applied to an investment strategy.
Leveraged ETFs are a great way to take advantage of the multiplying power of Margin. One can increase one’s investing power beyond what is normally allowed by Margin through using a 3x leveraged ETF. These leveraged ETFs will also magnify losses, but they eliminate the problem of margin interest and its drag on portfolio performance. Leveraged ETFs are best for short-term trades and can be relied upon if one has an effective strategy that helps them take advantage of market cycles.
Shorting is an often misunderstood method that can create greater profits in one’s portfolio. In fact, most professional money managers take advantage of it as an important strategy. Shorting allows the investor to leverage the negative motions in the market where they might otherwise have to sit on the sidelines in cash. While new regluations add more hurdles for easily shorting stocks, newer leveraged “inverse” ETFs allow one to buy and sell short positions without worrying about the complications associated with shorting.
Most investment strategies fail to mention one of the most critical parts of risk management having to do with setting limits on the maximum amount one will invest in any given equity. This is critical because buying or selling too much of any stock can trigger swings in the market that can have a negative impact on equity pricing. By capping maximum ownership to no more than 2% of the 30-day moving average of daily volume, one can make certain their trades will always execute in time and for a fair price.
There is a fixed cost of trading presently at around $0.0045 per share. This is a little known fact. Nearly all “discount” brokerages hide this cost within the trade. This is why professional money managers always use a flat “per share” cost for trading stocks and work with brokers that provide direct access to best pricing methods that offer the fastest execution without any of these “hidden” costs. While most brokers only offer this pricing to millionaire investors, some firms including ThinkorSwim and Interactive Brokers make this pricing available to the average investor.
Professional traders with large portfolios use algorithmic systems to help trade without upsetting the market. These systems allow traders to achieve “average” or slightly above-average performance. An alternative approach uses staged orders to capture a high and low price for a given time period which then achieves an average over time. It is recommended to use the brokers with the least transactional costs to implement any of these methods.
It is always recommended to seek financial advice from non-commissioned financial advisers before utilizing any alert system or implementing any strategy. These professionals are typically “fee only” advisors and their only motivation is to offer the best information possible. Once you feel comfortable working with this approach, scaling into the alerts is the best overall strategy. It leaves resources available to take advantage of better pricing should those become available.
The Summerland Alert System can adjust easily according to risk appetite. That being stated, it is critical to keep trading costs to a minimum because those trading costs can have a detrimental impact regardless if one is utilising the least or most aggressive methods in implementing the overall strategy.
Many methods and “gurus” advise using “stop losses” to set a limit for potential losses. The Summerland Alert System differs from these and stop losses aren’t utilized as these can kill trades prematurely. Instead, the method favors a combination of scaling-in as well as clear determining factors for profit taking. The combination of these elements creates a system of risk management that yields better than average performance.
There is a legal way to avoid taxes that is sanctioned by the U.S. Congress. The IRA is a powerful tool that helps one create completely tax free investment growth. The type of IRA an investor should implement will vary greatly on their individual circumstances and we always recommend talking with an adviser who can help in the proper configuration of an IRA to maximize its tax advantages for each individual investor’s case.
There is an easy trick to super charge returns generated by alerts. By using leveraged ETFs and margin, one can invest 110% of their available cash. By always seeking to be fully invested to this level, one can dramatically improve returns. When one receives an alert, one can invest up to their 110%. In other words, if one is invested to 80% of their available capital and an alert calls to scale in to 40%, one can invest 30%. This significantly enhances overall portfolio performance.
All the best! May you find great success as you work to improve your financial well-being.
Return to course index.
