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IRA Investing, My 3 Keys: Market Timing, Money Management and Equity Choice

I've traded stocks since I was 16, and have gained and lost more than I am willing to admit. Twelve years ago, a friend asked me to develop a computerized trading system for him. He supplied me with trading software, piles of books and hundreds of articles.

After mastering the software, I started testing many of the ideas presented in the books and articles. To my surprise and disappointment, I discovered that most of the examples illustrating the writers' theories were anecdotal.
 
Not one of the trading systems could stand up over time! This made me a cynical analyst. As a result, many of my trading principles are contrary to commonly accepted investing practices.
 
Beware Of Optimization
I developed hundreds of trading systems. They would work well with one stock or index, but not others. They would work well over one period of time, but not others. Each of these systems relied on a number of parameters such as the length of various moving averages or the number of standard deviations required for an entry or exit. Finding the best set of parameters is called optimization.
Most market timers and computerized trading strategies employ optimization. I believe this is the main reason for their unreliability and the failure of my early trading systems. I had to develop sound trading principles before any of my systems would to be sufficiently robust to work over time.
 
My Focus
My focus has been on 3 areas: Market Timing, Money Management and Equity Selection. Market Timing is the most important. Income Averaging and guessing bottoms are not credible strategies. It makes no sense to buy long when the market is declining. Equally, to expect an equity to drop no further is like believing in the Tooth Fairy.
 
Market Sentiment
A good Market Timer must include Market Sentiment to be effective. It needs to tell you when to be long, when to be short and equally importantly, when to be out of the market. In addition, it needs to be responsive to changing market conditions. What's that saying about closing the barn door? Market Sentiment is the vital ingredient that makes a market timer responsive.
 
Thinker on a CommodeMoney Management
Money Management follows closely behind Market Timing in importance. Many advisors recommend adding to positions as your equity rises in value; generally, I recommend the opposite. I prefer to watch my money go into the bank rather than evaporate. There are too many instances of market bubbles. Look at any market chart and you will see repeatedly steep drops following big rises.
 
Guessing a top as dangerous as guessing a bottom. With my approach, now and then you will make less profit and have fewer home runs. However, you will sleep much better at night - you'll need a lot less Alka Seltzer.
 
Preserving Equity
I've come to this 'Take the Money and Run' attitude after observing the sharper the rise in value, the deeper the subsequent pull-back. Money Management is to preserve equity. Few investment advisors recognize that good Money Management minimizes draw-down.

Princess on a pile of soft matresses
Picking Stocks
When it comes to picking stocks I'm as unreliable as Cramer. If someone asks me about a particular stock, More than likely, I don't have a clue. Usually, if I find something that looks attractive, it's too late.
 
Pick a Basket of Stocks
Instead of picking stocks, I employ searches that produce multiple baskets of stocks each according to a different set of criteria. There is no magical formula for the criteria. I favor three distinct sets of criteria that I employ only when the market is bullish:
  • The criteria used for the first search is based on stocks exhibiting a high product of growth times earnings.
  • The second search seeks high value stocks that are oversold.
  • The third search looks for stocks that have a negative product of growth times earnings, but are showing strong evidence of recovering.
Some stocks in these baskets will do very well, others poorly. My experience is that by having multiple baskets, draw-down is minimized -- I like sleeping well at night. I use an online service bureau to do these searches.
 
Ultra ETFs
Combined with these baskets I like to be invested in the Proshares Ultra ETFs. All their Ultras are leveraged 2:1. If the price of an index the ETF is tracking changes by 1% the ETF will change 2%. Proshares also offers inverse ETFs. As the index falls, its ETF rise in value. These allow me to safely trade the broad based market indexes both when the market timer is bullish and bearish.
 
Imagine you can earn 10% per year trading only during bull markets. At the end of 5 years $10,000 would grow to $16,105. Say you could trade in the bear markets and earn only 2% per year. This combined with your trades in bull markets would net $24,883 after 5 years.
 
Until the inverse funds were introduced I could not trade in my IRA during bear markets. Being able to trade in both up and down markets has added tremendously to my Annual Rate of Return [ARR]. Since I'm trading broad-based indexes combined with a market timer, my draw-down has been minimal even though these ETFs are leveraged. Furthermore, their ARRs have been excellent.
 
Summary
It is imperative that you obtain a robust market timer that will work well in bullish and bearish markets. Not only does it have to work well over a wide variety of time periods, but it has to be solidly founded so that it will work in different markets.
You need to employ proper money management. Take your winnings off the table and don't keep risking larger and larger amounts of money. You must preserve your equity so that you can continue to trade.
 
You need sound sets of search criteria that will pick a baskets of stocks that will perform well. If you plan to invest in indexes you can comfortably trade the ProShares Ultra ETFs or the Direxion ETFs - they represent leveraged baskets of stocks.
 
SPXTimer.com provides comprehensive support to its members through its newsletter and blogs.  It offers guidance with market timing and money management.  Two services are available.  The Gold level is coach potato simple for trading ETFs.  The Platinum is more involved for those who want to trade stocks as well.  Visit SPXTimer.com for videos detailing our simple, winning investment strategies.
 



Disclosure: NO POSITIONS