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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. 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. The program adapts to market conditions and under
strong conditions, this program moves with the economy (aimed up) about
60% of the time, opposite the market (aimed down) about 15% of the time
and about 25% of the time out of the stock market and in a money market
fund. Under poor conditions the reverse is true and the program will be
aimed down about 45% of the time, aimed up about 25% and in the money
market the other 30% of the time. The reduction of risk is a
critical element of this program, which is why we move into the money
market if we do not have a clear sense of direction.
Actual trading is not the
same as hypothetical trading, because of this, these programs were
developed while using real money to track the actual progress for over
five years. This was
a long process as you can see from our historical comments stretching
back well over those five years. 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 Dynamic 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. Our most reliable signals are those that remain constant for the
last 15 minutes of the trading day. The Rydex Dynamic 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.
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