If you tell me how much risk you can tolerate, I can tell you how to set up your investments for rewards. Why? Because high losses can take you of your investment game plan affecting your rewards. Some of the biggest winners in investing are people who have been willing to lose the most. So how much is your risk tolerance level?
For example, if you want to beat 85% of the fund managers and investors in the market, you will need to tolerate 3 successive years of over 20% losses and stay with your game plan while losing a cumulative 50% of your portfolio. I am not kidding. Just invest in the S&P500, and most 401K funds have at least one fund that mimics the S&P500 or SPY. Returns on SPY typically beat 85% of investors. But my problem is I cannot tolerate those levels of losses. I want to be able to make money every year I am invested. I don’t want losses. Is that possible? I think it is but my rewards are significantly throttled down.
I was looking at a study by No Load FundX which uses an upgrade system (momentum system) to make your money work more efficiently. Almost every year it returned a great return. Unfortunately the loss in 2008 was over 40% - completely intolerable for me. I use a momentum system on my 401K but will be quick to jump off the bus to protect my portfolio. No Load FundX has a simple questionnaire to judge your risk tolerance level. Unfortunately the results for me says what I already know, I am risk averse. Therein lies my problem. No Load FundX is right. I should just go with a mix of 70% bond funds and 30% stock funds and within that use market timing systems instead of my 50:50 mix..
Another thought going through my mind to make money independent of market direction is using managed futures; by me managing futures trades in the Q’s. I found that my trading system would work as follows. Assuming a starting point of $30,000 and using just one futures contract on the Q’s, I could see a loss of as much as $13,000 – $16,000 in the account at any time over a 3-4 month period with 4-5 consecutive losses when the market meandered sideways.. The gain over 4 years shows to be $70,000 during ripping up trends or down trends, taking the account to $100,000 in 4 years. The rewards look great but can I tolerate the losses of up to 50% of the account? Unfortunately the answer for me is “no” and I am working on how to dampen the losses. Perhaps I will have to buy protective stock options for the other side, reducing my losses and shrinking the gains. Now that would be unique – a trading account of managed futures using the Q’s where options are used to dampen the volatility… Hmmm got to think more about it.
Meanwhile here is my stock chart on the Q’s using the system I am thinking of. There are plenty of minor signals as well that I may or may not use. Ignore them for now. Just look at the main Up and Down arrows. The basic signals generate the 45% loss risk to >200% gain reward scenario in 4 years. It is also a system that would make money in up or down market direction and the gains would be long term gains just as Mitt Romney gets to do with his investment incomes. There is no reward for hard slogging work for the lower middle class wage earner. They pay a higher % tax rate than the rich who are taxed lower in their investments, even if it is in short term futures trading.
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