A review: trading according to risk appetite. Risk tolerance and the unshakable influence on achieving long-term, above average performance.
As has already been suggested, there are various ways to leverage the alerts depending upon one’s risk tolerance. The purpose of this lesson is to consolidate these methods into an understandable, easy to implement practice.
Determining one’s risk appetite is the first most important consideration. Carefully consider the following questions:
I can tolerate losses to my principle.
If the answer is “no” then STOP HERE. If you cannot take any losses, no investment strategy will work for you. Go seek professional advice as all investing methods, including buy & hold, will produce losses.
I can tolerate continuing to invest in what appears to be a losing trade.
I can tolerate a decline of 10% or more in my principle during a trade.
I can tolerate taking a temporary 15% loss in my principle.
If the answer is “no” to any of the above questions, you’ll need to change how you take advantage of the alerts. If the answer is “yes” to all of the questions, you can handle the most aggressive methods for putting the alerts to work. This method does contain risks but also has the greatest potential to generate results.
The 2 following approaches are the “bookends” representing the extremes one can utilize to change the method to match their risk appetite.
Least aggressive, less risk, lowest performance potential, slow growing:
Do not use any margin or leverage. Invest in the underlying indexes that are monitored by the Summerland Alert system.
Do not participate in shorts or inverse ETFs.
Divide the portfolio into 3 equal parts. Scale into each of the separately tracked ETFs using 10%, 20%, 30%, and 40% of the value for the set-aside part of the portfolio at each alert for that given trade cycle.
Regularly re-balance between the 3 equal parts so that you’re always working with the same potential investment capacity for each tracked ETF.
Most aggressive, greater risk, significantly higher performance potential, fast growing:
Use 3x leveraged ETFs to maximize portfolio performance.
Apply the 10%, 20%, 30%, and 40% scaling-in method to the whole of the portfolio.*
*NOTE: Eventually one may receive alerts one may not be able to act upon because one is already fully invested. In spite of this limitation, this actually produces better long term results because more funds are invested in trades where little or no scaling-in is required.
Hopefully it is clear how one can change how the alerts are utilized to manage risk and performance. The critical thing to consider is the influence trade costs have on overall performance.
An alert that generates a 1.5% gain using the most aggressive method is still profitable if the cost is .05%. But if one has scaled back the risk levels and one is paying that much or more for the cost of the trade, one may only break-even or worse, generate a loss on the trade even if they are using a less aggressive trading style.
Keeping trading costs down is a primary requirement regardless of the approach taken.
