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Investment Strategies
Over the years, the stock market has presented the best performance among the financial instruments within a market cycle. It can, however, from time to time, present relatively long periods of range-bound and/or high volatility behaviour. For this reason, the investor should plan to use money that can be available for relatively long periods only. Exchanged Traded Funds (ETF's) give you the flexibility and diversification you need to apply Timing-Lab signals to actively manage your money. They can be traded as a regular stock, most are very liquid, and can be sold short without the uptick rule. Moreover, its low cost of trade and ownership make this instrument a very good alternative to mutual funds.
An important aspect in money management policy is letting the compounding effect create wealth over time (check the Results Section) and also diversifying your portfolio among different ETFs and/or mutual funds. We present here some money management strategies that can be blended to create many others, according to each person's risk tolerance.
1. Long Only: (conservative strategy)
a. Buy signal: buy shares of your selected investment vehicles at the opening of the next trading day. Your position is known as long;
b. Sell or Cash signal: liquidate your current long position and keep the proceeds in a money market fund.
2. Long and Short: (aggressive strategy)
a. Buy signal: liquidate your current short position (shares sold short) and buy shares of your selected investment vehicles at the opening of the next trading day. Your position is known as long.
b. Sell signal: liquidate your current long position and then sell shares short of your selected investment vehicles. Your position is known as short.
Note: short-selling means selling a stock that you borrow from your broker in the hope of replacing it later at a lower price.
c. Cash signal: liquidate your current position, long or short, and keep the proceeds in a money market fund.
3. Margin Investment: (very aggressive strategy)
Using margin investment, you may double the size of the investment and, consequently, the gains or losses. You can apply margin on both the Long Only and the Long and Short strategies, thus doubling the results of each one. Before investing on margin, the investor should learn about the rules and fees charged by his broker, in particular, the margin call procedure.
Since selling short requires a margin account, qualified retirement accounts such as an IRA or a 401(k) are not eligible for shorting stocks. As an alternative to applying Timing-Lab strategies, the investor can buy shares of an ETF or an index tracking mutual fund that aims for the double, the inverse or double the inverse of the index it tracks (see the What to trade on the FAQ Section).
By choosing the Long and Short strategy, your position is known as 100% long or short. On the other hand, investing with a full margin, your position is said to be 200% long or short. You can achieve high returns by being positioned in between these 2 points.
A risk averse investor will make positions between 100-120% long/short. A risk taker investor, for instance, will go up to 120-160% long/short. To simulate your potential returns from the Results Section, you may choose a percentage position (X) and allocate S2 = X-100 to the strategy Long and Short with margin and S1 = 100 - S2 to the strategy Long and Short.
For example, a 140% long or short position is equivalent to a blend of:
140 - 100 = 40% of your investment allocated to Long & Short With Margin strategy, and
100 - 40 = 60% of your investment allocated to the Long & Short strategy.
You can check the performance of these strategies on the Results Section. If you are a subscriber and log on to the site, results will be current. If you are not a subscriber results will be delayed.
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