Investment Strategies 02 (Jun 10 - Jun 13)

[winston]

The 50-40-10 Investment Strategy Pays Off in Profits, Protection & Potential
By Keith Fitz-Gerald, Money Morning

What's more important: Having an investment strategy that performs strongly when the overall market is up, or having an investment strategy that guards against downside risk when the overall market is trending down, while keeping you in the hunt for inflation-beating, long-term profits?

Before you answer, consider the following:

* If you invested $1,000 in the Standard & Poor's 500 Index in 1950, it would have grown to $613,013 by December 2007.

* If you had tried to "time" the market and missed the 30 best months in that 57-year period, the value of your initial $1,000 investment would have risen to just $35,404 - a difference of $577,609.

* But if you tried to time the market and missed the 30 worst months in that time, your $1,000 would have grown to $9,509,094!

That's right - more than $9.5 million! (Obviously the study is a little dated given recent events but the net effect isn't all that different)

So, which is more important? Being there for the gains, or missing the worst the markets have to offer?

Picking stocks that skyrocket in good markets - but are vulnerable to wrenching plunges when markets roll over ...

Or holding positions that generate profits in good markets and that protect you in bad ones?

I don't know about you, but I'll opt for the latter every time.

There's a reality about investing and here it is: While the occasional quick hit long does pay off, investors are far better off building a well-balanced portfolio that protects them from sporadic stock market plunges, than they are packing a portfolio with speculative stocks that have more downside than they do upside.

Think you already have a well-diversified portfolio? Think again.

Diversification, as promoted by Wall Street, is a perfect recipe for failure when everything goes wrong. Simply taking your assets and spreading them out among some stocks, a few bonds, a little real estate, a dollop of precious metals and a splash of cash isn't enough. That's like ordering a variety of meals at a fast-food chain - some parts may be better for you than others, but the whole is hardly healthy.

So what's the solution?

The true answer lies not in how you spread your money around, but in how you concentrate it. You must first invest to ensure the security of your returns and second to maximize your profits relative to the risks you do decide to take.

Defensive Investing That's why I recommend - and personally use - what's known as the "50-40-10 Pyramid" strategy. This is a portfolio structure I developed many years ago and have advocated ever since - and is one that ensures I always have both minimum risks and a "positive expectancy" in my investments wherever and whenever possible.

If you're not familiar with the term "positive expectancy," it simply means the investment offers a return greater than the amount of money that's actually put at risk. Always remember: Successful investing isn't about winning all the time...it's about winning over time. picking more winning stocks than losing stocks; it's about making more money than you lose over time.

That's why To that end, I constantly harp on consistent risk management, is more important than profits over long periods of time. So, if you control the risks, the returns will come - and that's what the 50-40-10 Pyramid does.

Here's how it works:

* The "50" refers to what I call "base-builder investments" and should generally account for 50% of your portfolio holdings. The base-builders make up the "safety-and-balance" portion of the portfolio.

They consist of defensive positions that will hold their value better than other choices in nearly all market conditions, which will protect you from severe economic declines such as the ongoing European debt contagion.

Of course, that doesn't mean these investments are immune to loss. But they will generally take much less of a beating and be much less volatile than other investments when the going gets tough.

This 50% of your portfolio should be generally focused on income and dividend-paying issues. Many people are dismissive of income investments, but in good times they can produce annual gains of 20% or more. Plus, the value of dividends can never be understated: Some studies show that Since 1871, dividend payments and reinvestments have been responsible for the dominant portion of total stock market returns - in some cases 90% or more.

* The "40" is the percentage of the portfolio devoted to "global growth and income positions." These holdings are the "Global Titans" - companies with dominant market positions around the world. They're firms poised to benefit the most from rapidly emerging economies in Asia and elsewhere (with a focus on China).

In that role, these holdings will derive their strength from riding one or more of the major developing global trends. The most dynamic growth will likely come in the energy, commodity, environmental and infrastructure sectors. Increasing dividend payouts are an added attraction, boosting returns and safety.

* The "10" comprises accounts for what I call the "rocket riders." These investments - which often involve initial public offerings (IPOs), takeover targets, aggressive stocks in special situations, or even the buying or selling of options and other more speculative vehicles - offer spectacular upside potential and can lift overall portfolio performance well above market averages during good times, even though they constitute, at most, 10% of your holdings.

A 10% return on your entire portfolio can be exactly matched by a 100% return on just 10% of your portfolio - and the consequences of being wrong are far less severe.

In fact, that's the single most important benefit of adopting the 50-40-10 Pyramid structure for your portfolio - you preserve all the upside potential of your investments while still retaining the freedom to make an occasional misstep. With only 10% on the speculative line, a single miscalculation won't devastate your entire portfolio. It frees you from the pressure of having to be perfect.

You have the freedom to screw up!

Adhering to the Pyramid also helps keep emotion s out of your investing equation. If you structure your holdings according to the 50-40-10 formula - and adjust them regularly to reflect shorter-term gains and losses - you'll be positioned for the optimum upside at all times, even as you protect yourself against major trouble when the markets decline.

http://moneymorning.com/2010/06/02/investing-strategy/

[kennynah]

* If you invested $1,000 in the Standard & Poor's 500 Index in 1950, it would have grown to $613,013 by December 2007.

* If you had tried to "time" the market and missed the 30 best months in that 57-year period, the value of your initial $1,000 investment would have risen to just $35,404 - a difference of $577,609.

* But if you tried to time the market and missed the 30 worst months in that time, your $1,000 would have grown to $9,509,094!

amazes me how these people can throw out numbers just like that.... incredible....

i'd sooner believe pigs can fly than to believe the stats of this article... but that's me...a natural skeptic...

[iam802]

The 50-40-10 Investment Strategy Pays Off in Profits, Protection & Potential
By Keith Fitz-Gerald, Money Morning

.....

So what's the solution?

The true answer lies not in how you spread your money around, but in how you concentrate it. You must first invest to ensure the security of your returns and second to maximize your profits relative to the risks you do decide to take.

....

Actually, the article has a nice point about concentrating it rather than diversifying it.

I know, in this forum, there are various opinions about diversification vs concentration.

My personal preference is to be focused (because I can't handle too many things)

[winston]

amazes me how these people can throw out numbers just like that.... incredible....

He may fudge the numbers a bit but it would be quite foolish to say something without having the stats to back it up.

[winston]

TOL:-

I'm beginning to feel that the short term trades are a bit too crowded.

Not only do you have to swim with the sharks, the news flow nowadays are instantaneous. This leads to instantaneous reaction and if you are not sharp, you dont really know what has hit you.

A Stop-Loss is only useful if the reaction is orderly. But in a gap-up ( when you are shorting ) or a gap-down ( when you are long ) typed of situation, a Stop Loss is not really that useful.

In addition, I have also experienced some situations where the BBs were using temporary bad news to hit your stops, bring prices down 30% and then move things up again later.

Maybe it's time to forget about Scalping and Swing Trading and to think a bit longer term...

[helios]

Conventionally, June is not a good month for trading ... ?

[winston]

Conventionally, June is not a good month for trading ... ?

I dont really based my trading activities on which month it is. That's almost as good as using Astrological Charts, Feng Shui or "1-900-Psychic"

If I have not mistaken, Mark Twain has said somewhere before that "Jan, Feb, Mar, Apr, May, Jun, Jul, Aug, Sep, Oct, Nov and Dec" are not good months for trading.

Take care,
Winston

[kennynah]

everyday is as good a day as the next to trade..... some days are better only becos they are weekdays...

[winston]

TOL:-

I'm starting to think that the short term trades are getting too crowded. Everybody seems to be an expert on the minutre by minute movement of the EUR, the latest US economic data, the US Futures, any negative news from the Eurozone ( even those from a third world country like Hungary ) etc. Everybody seemed to know the Supports and Resistance on the charts.

I'm now consciously forcing myself to look out two to three years and see the longer term trends. What do I see ? What counters can I buy on any dips that can ride out the longer term trend but have a short term catalyst that can go against Market Direction ?

Someone once commented ( was it Templeton ? ) that whenever a certain investment style is in vogue, it's time to switch to another less popular investment style. I'm forcing myself to switch but it's an uphill task ...

[helios]

Like Dengue and Flu viruses, they will mutate and switch their genes to another phenotypes at the peak of the infectious cycle ...