Dear Trader
A student of mine recently showed me a back test of one of my core techniques for investing, Channel Breakout. He tested on a bunch of stocks. The results were not great.
But it got me thinking. The test was invalid! Here's why.
The most important decision in stock investing is asset allocation. Normally, this means do you put your money in stocks, cash, or bonds. (Yes there are other asset classes but this is the traditional asset allocation. For purposes of this discussion, the normal case is fine.)
Academic studies show this over and over again. For example, if I always keep my money in cash, I will never suffer from the Covid Crash or the Crash of 1987. It has no price risk. But, on the other hand, investing in stocks outperforms cash or bonds over any given 10 year period.
But the decision is more complicated than that. Today, the market might be moving sluggishly higher but there are some potentially bearish factors that may be coming up. So maybe I should just invest 60% of my portfolio in stocks and 20% each into cash and bonds. Wait, maybe it should be 59% in stocks or 61%. Get my point? Every day you are making a decision of asset allocation.
Some people have said to me that the stock market is too risky so they keep their money in the bank. That is an asset allocation decision. It may be implicit but it is still a decision by default.
So let's take the last half of 2020 as an example. It was a strong bull market. If you were long 100% stocks you could have made 30% return. If 50% long then just 15%. If you were net short the market, which is an asset allocation decision, then you could have lost money fighting the bull market.
So your results from the asset allocation decision alone could have ranged easily from losing 5% to gaining 30%. That is a huge range and dwarfs the returns caused by your trading techniques.
Yet nearly everybody focuses on the least important decision of when to buy and when to sell.
Your first and most important decision is your asset allocation decision.
How do you make that decision?
There are really two ways:
- Macro economic analysis
- A sophisticated stock selection technique
There is only one place in the whole world where you can learn these two techniques and that is my new membership program, the Wealthbuilder Insider. Click here to learn more info.
Isn't it time you stop wasting time on the least important things related to making money and focus on the most important?
Click here to know more now!
Good important trading,
Courtney Smith
P.S. Program launches on October 4, 2021
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