Long Term Investing
In his wonderful book, 'Multiple Streams of Income', best selling author Robert Allen advises Investors to divide their Stock Market investment and trading capital into three portions -50% invested long term (forever) in an Index Fund, 30% invested in Accelerated Stock strategies and 20% in options or high risk investment strategies.
This article will discuss long term investing and how technical analysis can alert us to points in time when it is prudent to take profits and exit the Stock market.
Not diversification for the sake of it, but diversification to help us sleep at night and enhance our long term returns.
Multiple Streams of Income was written in the year 2000 - the 18 year Bull market had made millionaires of anyone who bet the farm on Stocks rising forever - but investors needed an exit strategy of some sort in case the trend didn't continue, and too many of them didn't have one.
Now many are paying the price.
For years, buy and hold was a no brainer - just buy the dips and the Stock market made you rich - until it all came to a sudden end in the year 2000.
So, what do Investors, as opposed to traders, use as an exit strategy?
The weekly chart below is the S&P 500 with two moving averages, 20 weeks and 40 weeks. Charts available at StockTradingReview.com
An excellent strategy that some of Peter's friends use is to hold this Index when it's going up, and to exit or hedge your position on a moving average crossover on the weekly chart to conserve profits when it starts going down.
After all, if it's not rising in value, why own it?
Long term wealth creation demands that we prudently invest in assets that are rising in price, despite short term corrections against the major trend.
These two moving averages give a graphic display of the major trend. When the trend is up, they stay long - when it's down, they stay out, hedge their positions or go short - simple.
By placing these two moving averages on this chart, it allows even someone the age of Peter's daughter to tell him the direction the market is taking.
It protects capital that would otherwise be invested in this Index for investment in other areas, because it avoids being in this market through the downtrends.
Of course, the Index Fund managers hate people who switch from fund to fund or to cash when the trend changes.
They want investors to stay invested forever - management fees and trailing commissions may have something to do with this...
Many traders regularly receive a publication from one of the big Index Fund managers and they are always advising him that it's time in the market, not timing the market that is important - if they say it often enough then it starts to sound like it makes sense.
The chart above is graphic proof that even a 7 year old can time the market to some degree given the right tools. Charts available at StockTradingReview.com
How simple - 2 moving averages saved a fortune for anyone who was watching. Why hold something that is obviously falling in price.
The same two moving averages got investors in again when the trend turned up.
This strategy didn't give an entry signal until May 2003, 2 months after the low, but anyone who hedged or exited on the moving average crossover in November 2000 missed being fully invested during the majority of the Bear market, when many investors lost between 50% and 70% of their capital, or worse if they were leveraged.
And remember, for savvy traders this is for long term investment in Stocks, not our more speculative holdings.
This is their wealth creation money - their retirement account. This is the money they don't put at unnecessary risk.
When the market goes down like this, Fund Managers call it Volatility. They won't call it what it really is - a Bear Market!
No, investors would take their money out of Mutual Funds if the Managers said that we were in a Bear Market, and they would lose those wonderful trailing commissions and management fees.
Just call it a bit of volatility (down 50% on the S&P, 80% on the Nasdaq - volatility??) and investors will stay in for the long term because that's what their advisers tell them to do, or they will miss the bottom when it eventually comes - does that make sense to you?
Now nobody can tell for sure how far any rally will go, or if a bear market is over, until well after the event. But this simple Moving Average crossover system has kept Peter's friends on the right side of the market for many years.
They ride the up-legs of the market, and stay out of the down legs. They put their cash in Money Market Funds while the trend is down and wait for the rallies.
Another hedging strategy they often use is to buy Put options to cover their entire Index exposure - for example, if their Index fund position is $50,000, they buy long dated put options, say 12 months to expiry to minimise the time decay, to cover this level of market exposure.
They think of it as an insurance policy - they pay insurance on everything else they own, so why leave their Stocks and Mutual Fund investments at the mercy of the market - wealthy people stay that way because they protect the downside.
Time decay on options is an issue of course, but watching a long term portfolio decrease by 50% or more and doing nothing should not be an option for any serious investor.
The idea is simply this - saavy traders hold positions that are with the trend, whether it is in Property, Shares, Mutual Funds or Bonds. They do not hold un-hedged assets that are in a sustained downtrend.
Holding Stocks and funds that are going up is like riding the up escalator, it's easy to make money. By holding Mutual Funds or Stocks that are falling, it's like running up the down escalator - you have to work hard just to stay in the same place.
Then, if you stop running, it takes you right down to where you started again. This is not the way to build lasting wealth.
This is blindingly obvious - but it is amazing how many otherwise intelligent investors have lost fortunes during the bear market that started in 2000.
A smart trader's advice - put a couple of Moving Averages on the funds and Stocks you hold in your long term investment portfolio, then ask a small child what the trend is.
If they don't say up and you're still invested, all he would say is make sure you have your position hedged!
To Your Trading Success,
Tony Spann and the Team
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Choosing A Fund
For years I have been saying you must have a fund that is outperforming the S&P500 Index. Well, I've changed my mind. Now I think your fund should be outperforming the NASDAQ Composite Index. So far this year, March 30, the S&P is up 1.3% and the NASDAQ Composite is up 9.5 %.
Invest In The Stock Market For The RIGHT Reason, Using The RIGHT Choices
Invest in the stock market for the RIGHT reason, using the RIGHTchoices!
Selling Strategies - Setting a Stop Loss
Sometimes the best way of lowering exposure to risk is not to invest at all! However, when we make the decision to jump into the muddy waters of the stock market, its always a good idea to have a life jacket ready, just in case.
A Penny for Your Stocks
According to Investopedia Inc. the penny stock market has seen phenomenal growth this past decade. From '94 to '03, the Over-the-Counter Bulletin Board trading volume increased an astounding 8900%, equaling a total of 63% of the NASDAQ and 78& of the NYSE share volumes. Many an investor has succumbed to their siren song.
One of the great "secrets" of successful people is discipline and it doesn't make any difference whether it is manufacturing, processing, servicing or investing in the stock market.
Trading Stocks ?Never Forget About A Past Trade
We all know that emotions control every decision that an investor makes in any type of money related vehicle. Whether is be the stock market, real estate, art work or antiques, emotions ultimately set the final price on both sides of the transaction. Some investors have greater control over their emotions while other investors are destroyed by their emotional reactions to certain events.
Every day on CNBC-TV they show a 200-day moving average line superimposed on the stock price history. It seems they give great credence to this manufactured line as it represents 10 months of price action. What is it? Does it really mean anything?
Stock Valuation using the SMP Model
Disclaimer:Please note that I do not necessarily purchase, own, or partake of any of the securities or other financial instruments mentioned in this article. I also do not take any responsibility for any actions resulting from any actions taken by anyone who reads this article. You are responsible for your own finances - no one else. Do your yown due diligence when researching financial matters.
3 Components Needed for Beating the Market
Time to look back
When is a dividend not a dividend?
Can?t Stand The Heat
It seems that every day I turn on the TV and find a Poker game. Texas No Limit seems to be all the rage these days. I love watching it. When I discuss this with others, their response is always the same, "You should play." Ah, but what they don't know is I stay out of the kitchen. As far as risk to reward ratio. That's a gamble I'm not willing to take. I prefer to invest my money. Sometimes I gamble in the stock market, but as long as I stay within my comfort zone (long term), I don't mind.
Forces that Move Stock Prices
Among the largest forces that affect stock prices are inflation, interest rates, bonds, commodities and currencies. At times the stock market suddenly reverses itself followed typically by published explanations phrased to suggest that the writer's keen observation allowed him to predict the market turn. Such circumstances leave investors somewhat awed and amazed at the infinite amount of continuing factual input and infallible interpretation needed to avoid going against the market. While there are continuing sources of input that one needs in order to invest successfully in the stock market, they are finite. If you contact me at my web site, I'll be glad to share some with you. What is more important though is to have a robust model for interpreting any new information that comes along. The model should take into account human nature, as well as, major market forces. The following is a personal working cyclical model that is neither perfect nor comprehensive. It is simply a lens through which sector rotation, industry behavior and changing market sentiment can be viewed.
What Are You Waiting For?
Do you own any mutual funds? In an IRA or 401K or wherever. Privately or at work.
How To Beat The Mutual Fund Companies At Their Own Game
You'd have had to be living on a desert island with no TV, newspaper or internet connection to have missed hearing about the great mutual fund scandal of 2003.
You Wont Like This
Why? Because I am going to shatter your conventional wisdom as I have many times in previous columns about the lies that Wall Street continues to tell you. This time we are going to go deeper into the economy to unearth the truth about lies the politicians are telling you.
If you have a pension plan at work you will want to read this and if you don't you will still want to because it affects your retirement account.
Hedge current portfolio positions and gain access to capital resources through loans against free trading, aged affiliate or aged non-affiliate securities. Make proper use of your assets while waiting for performance and hedge your position should the asset move against you.
Value Investing: Selecting From The Bargain Bin
Picking a beaten-down stock requires a different kind of selection process. Normally, most companies beaten down this far have no earnings to speak of. Of course, if the company continues to earn money, one can apply normal valuation techniques. By that measure, many of these stocks appear outrageously undervalued: an indication of great buys. But this may also be a red flag that things are "too good to be true".
Hold Em and Fold Em
When most analysts, financial planners, fund specialists and investors try to decide whether to buy a particular stock they immediately go to the financial statements to determine the growth potential of the company. Numbers and more numbers. Then management analysis and industry speculation. Unless you are an experienced financial analyst (and there are not very many good ones) the numbers in the reported statements can be very misleading - just as the company Controller wants them to be.
Lights of the Stock Market
There are red lights, green lights, blue lights and spot lights. There are orange lights, pink light and flash lights. There are search lights and micro lights. And the one you must obey is the stop light.
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