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Other Articles
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Strategy
Investments with Eye on Risk Shine
By David Wismer
Financial Consultant, CFP, Wismer Financial Services
There are three elements that any investment plan must have to succeed: solid performance, low volatility and profit protection. The first point is what most investors want to talk about but the last 2 are where millionaires are made. Countless people have money invested with no “strategy” for managing wealth. Hence, they subject themselves to unnecessary risk. Markets go up and markets go down. The key is to be on the “correct side” of the market; offensively positioned for growth during “bull” markets and defensively protecting from loss during “bear” markets. Investor have been raving about the Core-ShaveOff is a trend following system designed to help do exactly that.
Before we begin, we must dispel some myths about investing. First, ”Buy and Hold” is a common yet fundamentally flawed approach because it only works in bull markets. It isn’t useful during bear markets or when the market moves sideways. The issue at hand is how to manage money during different market cycles.
Look at the following graph of the Dow Jones Industrial Average from 1965 to 1983. A buy and hold strategy would have returned 0% during that 17-year “sideways” market. However, you could have increased your portfolio by implementing a strategy to fit that market climate. Next, Diversification is the key to your investment success. There’s more to it than that. It is as important to diversify among different “strategies” as it is among “investment classes”. The first attempts to capitalize on market inefficiencies while the other suggests that markets are always efficient. Another flawed belief suggests that you must increase risk if you want higher returns. Quite the contrary, reducing risk often increases the end result.
Let’s now discuss the Core-Shave-Off Strategy:
1. Start with A Core
20% of investment assets to start
Complete protection from market drops
Capitalize from market increases
A+ rated companies or better only
Bonuses to 10% on each deposit
2. Invest the balance
Evaluate company earnings, profit margins and relative strength.
Track the institutions to find where the “big money” is flowing
Evaluate charts to identify properly entry and exit points.
Protect your position with “stop – losses”
Allocate assets according to your risk tolerance and time frame
3. ShaveOff to Core
Transfer a portion of growth to Core each year using Shave-Off (i.e. make 10% in market – transfer 5% to Core)
Never take on more risk than you can stomach. It’s far better to get smaller, steady returns that it is to allow your portfolio substantial volatility with the hope of making it back down the road. Therefore, target moderate returns. This is best illustrated by pointing out that each 20% drop your portfolio takes requires 25% just to get back to square one and each 50% drop requires 100% return to do the same. It’s far more important to keep what you have than to make up for lost time.
It’s essential to protect your account from market losses. Each of us has a particular level of risk we’re comfortable with. For some it’s 5% while for others a 10% loss is tolerable. Regardless, once we reach that point it is important to take action to prevent further losses because if we don’t when we allow our investment to breach that line, we suddenly become unwilling to sell and hold on to losers when we should sell.Subsequently, we subject our money to greater volatility. We saw this numerous times during 2000. Investors who should have sold when down for example 8% allowed losses of 15% and 20%. Suddenly they couldn’t bear selling so low. You’d think it would be easy to get rid of the losers but human nature is a funny thing and they’d continue to watch their accounts fall, hoping desperately for a recovery. That’s a bad place to get to.
Use a layered approach when building your portfolio. Add layers as your assets grow. Establish your “Core.” It is foundational because it has no market volatility. Each layer represents an element of risk. The inner layer has the least risk, while the outer layer has the most. Always start from the center and move outward committing less capital to each successive layer to control volatility. There are mathematical principles at work here. Order is important.
Step up the risk management in the outer layers using “Stop” losses, a seasonal program or Bull/Bear strategies. Finally, lock in profits by shaving-off a portion of the gains from each layer annually and relocating them to the Core (which has no downside potential). Our “Shave-Off” approach is a conscious, systematic way of protecting profits. The importance of this can’t be overstated. For example, suppose you buy ABC Corp. at $10/share. If it grows 20% to $12/share and you sell half, your break-even point is now $8/share. This extra “wiggle room” creates additional asset protection. The Core-Shave-Off strategy has less risk than both the Dow Jones Industrial average and a buy and hold strategy and has outperformed
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