Palisades Research Systems

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Risk:

Every day you are in the stock market you have your capital at risk. Some products, like index funds, reduce that risk through horizontal diversification. But they can't protect you from a down market which can bring down all asset classes simultaneously. What is needed is vertical diversification; adding an element to your portfolio that is uncorrelated and doesn't necessarily move in the same direction as the market. Our programs are uncorrelated with the market and can work to reduce overall risk in a larger portfolio while being excellent programs on their own.

The reduction of risk is a critical element of our programs, and risk is directly tied to market exposure. When comparing any investment to the market you need to look at the sum of the daily changes of that investment, up or down, and compare that to the sum of the market's changes. We offer four programs with varying levels of risk to match the requirements of individual investors. Since our approach is statistical there are times when the next day's direction is just too close to call so we move to the money market to avoid risk. 

Actual trading is not the same as hypothetical trading, because of this, our Primary program was developed while using real money to track the actual progress for over five years prior to release. This was a long process as you can see from our historical comments stretching back well over those five years. Newer programs are also tracked using real money.   

There are no commissions associated with trading these funds and they trade at net asset value (bid price = asked price), so there is no slippage. We use the Rydex 2x strategy funds which move at about twice the rate of the S&P500 or Nasdaq 100.  This doubles the risk and doubles the reward if you look at a single day's results. When considering a number of transactions over time this risk decreases as we are in the money market a significant portion of the time. 

The Rydex 2x strategy funds that we use for our transactions actually trade twice a day.  This offers us the opportunity to make an adjustment after the first hour of trading when we deem it necessary. 

Understand the difference between genius and a bull market. When comparing any two methods in investing or science the method with the larger sample size (greatest number of separate transactions or decisions) will be the most reliable when projecting into the future.

The Prudent Man Rule is a common law standard applied by the courts to the investment of trust funds. When the original prudent man rule was introduced many years ago it referred to the type of investing that a prudent man would undertake. This prudent investor was someone who would invest in bonds and dividend paying stocks of solid companies that had low debt and a history of being in business a substantial number of years. When modern portfolio theory came into being it recognized that a portfolio must be looked at as a system and not as individual components.

What might be a risky investment by itself or in some portfolios, could be a prudent investment when it is part of an overall investment plan in a different portfolio. In general, a plan that utilizes both vertical (uncorrelated) diversification as well as horizontal diversification is more prudent than one that only offers horizontal diversification -- provided the components are based upon sound principles to begin with. 

Remember, all investment involve risks.  Past performance is not a guarantee of future performance.  You must try to avoid the risks you can avoid, and minimize those you can't.  Diversify your investments both horizontally and vertically. Don't take claims at face value and don't be pressured into an investment.  Understand what you are investing in and make sure it makes sense to you. 

 

Avoid the risks and the gains will take care of themselves.