Posts tagged with: Asset allocation

Most 401(k) plans contain a variety of fund choices, so it can be hard to decide which ones to put your money into.  In this episode, I explain the best way to evaluate funds, separating the winners from the losers.  I also give my recommended asset allocations for the remainder of 2017, based on where we stand as of May.


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Section 1: Stock Funds

  • Domestic vs. international
  • Market cap (small/mid, or large)
  • Growth vs. value
  • Active vs. passive
  • Expense ratios

Section 2: Bond Funds & Fixed Income

  • Treasury bond funds
  • Corporate bond funds
  • Mixed bond funds
  • Bond fund duration: long-term, intermediate-term, short-term
  • Active vs. passive
  • Stable value funds
  • Money market funds

Section 3: Target Date Funds

  • How they work
  • Dangerously simple, and simply dangerous

Section 4: Alternative Funds

  • Commodities
  • Real estate
  • “Real value” funds
  • Should you invest in these?  When?

Section 5: My Target Long-Term Asset Allocation


401(k) statistics from the ICI


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Keep a Defensive Stance, and Be Selective

Today, I’m releasing new asset allocation targets for long-term oriented investors of all ages, as well as active traders.    Remember, these are aimed at a general audience and are not personalized recommendations for any single investor.  Consider your own personal goals and risk tolerance when making your final selections.

I’ve made two updates recently.  First, I added a brand new asset class: Cryptocurrency.

Bitcoin, Ethidium, Litecoin, and other cryptocurrencies are exploding in popularity in 2017.  This is only the beginning of a long-term trend though.  We’ll see these digital currencies fully enter the mainstream over the coming decades.  For now, I’m suggesting only a small allocation, close to 1% of total assets.

Make sure to spread this allocation across a bunch of different digital currencies: at least 10 different ones, the more the better.  Keep the most in Bitcoin for its (relative) stability and wider acceptance, but include some investments in smaller ones too (known as “altcoin”).  The majority of “altcoins” will ultimately become worthless, I believe, due to their ease of creation – but you are looking to invest in a basket of many of them, so you end up with at least one that explodes in value (20x, 50x, or more) and dwarfs the losses in the ones that don’t pan out.  Altogether, don’t put any more than 2% of your assets into this area unless you carefully research it and you know what you are doing – don’t gamble with your money.  If you are closer to retirement or just a conservative investor, you might want to buy a tiny amount of Bitcoin (less than 0.5% of assets), let it sit, and just leave it at that.

Cryptocurrency carries many of the same benefits as precious metals (PMs), such as anonymity and preservation of purchasing power over the long-term.  Yet there are key differences, the most significant being the high degree of volatility in digital currency.  It’s still a very new market, therefore we can expect high volatility to continue but also tremendous potential for growth.  Wait for a bit of a pullback before investing, but don’t get FOMO (Fear of Missing Out).  It’s not too late to jump on board: cryptocurrency is the real deal and a legitimate asset class already.

For more information on cryptocurrency, check out Coinbase, where you can set up a digital wallet and make an investment, and Let’s Talk Bitcoin, where you’ll find links to a variety of podcasts and blogs about the subject.

The second update I made was to increase the allocation to real estate by a few percentage points.  Many investors will already have this much exposure to real estate through equity in their personal residence.  For those that don’t, REITs will get you there.  Listen to my introductory podcast on REITs to learn about this exciting asset class.  I also recently published a video on one of my favorite picks.  I’m careful to choose REITs that I think are most likely to maintain or grow their share price over the long term while paying a good dividend yield.  Stay away from most REITs in the health care, office building, and retail areas.

OK – now for the asset allocations.

If you’re a long-term oriented investor, making adjustments to your portfolio only a couple times each year, these are the baseline targets:

If you are an active trader, consider these allocations instead.  They’re based upon the long-term targets, but adjusted for my latest intermediate-term market outlook (6-18 month horizon).  These change much more frequently, as chart patterns emerge and develop.

You read that right: 0% to equities.  This is not the time to be reaching for dividend yield or jumping onto a trendy growth stock.  You can still keep some stocks in your portfolio, but put on some tactical short positions in the weakest areas of the market so that you’re market-neutral overall.  You might also consider preferred stock for the greater protection it provides, over common stock, but remain cautious because preferred stock will drop if we see a big downturn in the market.

Wealth-building is a marathon, not a sprint.  Staying defensive in a market like this one will keep your portfolio intact.  A big cash reserve will position you to leap on bargain prices when we see them.

Going forward, members of our community platform will receive updated asset allocations at least one week ahead of when I release them to the public blog.  Members will also get detailed sector-by-sector breakdowns within several of these asset classes (e.g. retail stocks vs. utilities, consumer staples, etc.).  Membership starts at only $5/month for the Bronze level.

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Wise investors know that it’s a good thing to keep a portion of assets in cash-equivalents at all times, but do we really have to settle for paltry interest rates like 0.01%?  Absolutely not.  In this episode, I teach you how to put your cash to work without taking too much risk.  With interest rates at historically low levels worldwide, you’ve got to work a little harder than usual to get a decent return and stay ahead of inflation.

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Section 1: Why You Should Never Be 100% Invested in the Markets

  • Cash-equivalent assets serve many purposes:
    • Emergency funds
    • Saving for big purchases
    • Taking advantage of buying opportunities in the market
    • Protecting against bouts of deflation in financial assets, ala 2008-2010
    • Avoiding costly margin debt
    • Reducing risk level of the portfolio
  • Three “buckets” of cash:
    • Emergency Cash
    • Structural Cash
    • Tactical Cash
  • The best way to deploy that cash?  It’s different for each bucket.

Section 2: What’s the Right Amount of Cash to Hold?

  • It’s different for every individual
  • Factors to consider:
    • Personal balance sheet
    • Are you primarily a: short-term trader, intermediate-term trader, or long-term investor?
  • My baseline suggestions for the three “buckets” of cash

Section 3: Emergency Cash

  • Top Priorities: Safety and Liquidity
  • Interest?  Forget about it!

Section 4: Structural Cash

  • Stable value funds in an employer-sponsored retirement account like a 401(k), 403(b), or TSA
  • Build a laddered portfolio of certificates of deposit (CDs) or corporate bonds
  • There’s a right way and a wrong way to do this!

Section 5: Tactical Cash

  • Higher liquidity and yields, but you can lose a portion of your principal in a downturn
  • Short-term bond ETFs and mutual funds
  • Some of my favorite funds for tactical cash



Bankrate Safe and Sound Ratings

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(Wrap-up of ten-part series on Financial Truths)

In this episode, I tie together all the concepts I’ve introduced throughout this 10-part series on financial truths.  I illustrate a few different asset allocation ranges that will position you for profits and preserve your capital so you can trade for many years ahead.

Pick one of these asset allocation ranges that best suits your goals and risk tolerance, then just make sure your portfolio stays within the ranges at all times.

This process works for long-term investors in a 401(k) or IRA, as well as those with short-term trading accounts.


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Important disclaimers to review

Asset Allocation Workbook in Microsoft Excel – Download Here



(CC image from Joe on Flickr)

Section 1: Financial Truths for Traders & Investors

  • Review of the series (find prior episodes here)
  • Why I chose the topics I did
  • How it’s different than what many others teach

Section 2: Take Action

  • A flexible asset allocation framework
  • Start today with the attached spreadsheet
  • Find the row that best suits you:
    • Choose one of the four categories based on how active you want to be
    • Move to the right side of the table.  Look at the annual loss section, with the 1-in-20-year, 1-in-10-year, and 1-in-5 year loss amounts: which row matches most closely with your personal risk tolerance?
    • Go to the right side of the worksheet and select that row from the drop-down box.  Those will be your asset allocation targets.

Section 3: Not Quite Right?  Here’s How to Adjust

  • Found the closest fit, but want to reduce the risk?  I explain how.
  • Found the closest fit, but want to take on more risk?  I explain how.

Section 4: The Next Level

Section 5: Make Sure You Stay on Track

  • Calculate and monitor your asset allocation
  • Calculate “asset exposure” for each investment or trading position you own
  • Add up the asset exposure by asset class (simple investment universe) or subclass (detailed investment universe)
  • Note: If you are using a highly leveraged strategy, use total assets in the denominator instead of asset exposure


My personal long-term target asset allocation baseline as of Feb 2017:

I’m currently short equities and much more heavily weighted towards cash equivalents (“Currency” category) like CDs and money market funds, based on intermediate-term trends.  This is the long-term baseline.


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Here’s How to See the Trend

(Part 9 of ten-part series on Financial Truths)

Section 1: Why Did Your Short-Term Pattern Fail?

Section 2: Follow the Money: Start with Inflation/Deflation

Section 3: Make a Long-Term Forecast

Section 4: Make an Intermediate-Term Forecast

Section 5: Identify & Trade the Best Opportunities


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wide view

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Blog Post References:

An Active Management Plan for Self-Directed Investors

Inflation, Deflation, and Your Portfolio

Fearless Forecasting for Long-Term Investors

Fearless Forecasting for Traders


Section 1: Why Did Your Short-Term Pattern Fail?

  • Why do chart patterns fail?  Most often, it’s the higher-level trend – found in the sector, the broad market index, or longer-term stock chart.
  • SBUX looked bullish to a short-term trader on 11/3/15 …

    … but the sector was WAY overextended and at a key level …

    … and the S&P 500 had recovered as much as it could. Nowhere to go but down.

    Long-term chart looked bubbly! SBUX still hasn’t broken this level as of 2/6/17

  • Always study the sector and market (higher-level assets)
  • Always study the intermediate-term and long-term trends (higher-level trends)

Section 2: Follow the Money: Start with Inflation/Deflation

  • What inflation is
  • How we measure inflation
  • Why inflation matters so much
  • How to forecast inflation

Section 3: Make a Long-Term Forecast

  • I introduced this concept in Episode 4
  • Pull up a weekly chart, 25+ years of data
  • Examine the four dimensions of: Price, Pattern, Momentum, and Time (see Episode 7 for details)
  • Choose your baseline asset allocations
    • Best approach: Rank all the choices in your investment universe from highest to lowest Sharpe Ratio
    • Simpler approach: Just adopt my allocations (shown below as of February 2017), but adjust as needed for your risk tolerance, goals, and market outlook
    • More details coming up in Episode 10!
    • As of Feb 2017, I’m bearish on most financial markets over the long-term, so these are conservative allocations despite my relatively young age.

      The sector-by-sector view for serious traders. This shows how I divide my stock allocation across various sectors. They’re ideal targets, not something I try to exactly match my portfolio to. As of Feb 2017.

Section 4: Make an Intermediate-Term Forecast

  • Pull up a daily chart, 8+ years of data
  • Examine the four dimensions of: Price, Pattern, Momentum, and Time (see Episode 7 for details)
  • “Flex” your baseline allocations, going overweight the assets that you expect to rise in the intermediate-term, and underweight or short the ones you expect to fall (review Episode 4 for more details)
  • Overweight bonds, underweight stocks, and short the US dollar as of early Feb 2017. But I’m still diversified.

Section 5: Identify & Trade the Best Opportunities

  • You’re free to trade anything within the asset class or sector; just stay reasonably close to your asset allocation targets
  • Remember that options and futures are leveraged.  Don’t underestimate the exposure.
  • Update periodically
    • Re-evaluate the long-term trend every few months, or sooner if the intermediate-term trend has changed
    • Re-evaluate the intermediate-term trend every few weeks, or sooner if market conditions warrant
  • Learn more macro trading strategies and stay current on market news by viewing our online trading videos and live streams


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(Part 4 of ten-part series on Financial Truths)

Section 1: What Is Diversification, and How Do You Measure It?

Section 2: Determine Your Personal Risk Tolerance

Section 3: Set a Baseline Asset Allocation

Section 4: Define Ranges (Min/Max) Around Your Baseline Asset Allocation

Section 5: Trade and Invest, Staying Within the Ranges

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Section 1: What Is Diversification, and How Do You Measure It?

  • Diversification = Owning a variety of assets that are less than 100% correlated with one another
    • Every pair of assets has a correlation coefficient, a statistic (between -1 and +1) that measures how likely they are to move in the same direction over a given period of time
    • Example: A portion of the correlation matrix I use, calculated from historical data:
  • If the standard deviation (volatility) of your overall portfolio is significantly lower than the standard deviations of most of the individual assets inside it, you are well-diversified
  • Owning a few stocks in the same sector, or the S&P 500, isn’t enough diversification
  • For options (puts and calls), calculate the true underlying exposure (number of contracts * underlying share price * delta)


Section 2: Determine Your Personal Risk Tolerance


Section 3: Set a Baseline Asset Allocation

  • Map your investment universe
    • Long-term investors: use the short list of six major asset classes
    • Traders & active investors: use the longer list of asset subclasses, which includes the ten stock sectors
  • Start with your personal balance sheet (introduced in Episode 3); set Cash % = Cash Requirement / Total Assets
  • Divvy up the rest between stocks and bonds according to your age
  • Carve out a little for precious metals and commodities
  • Adjust up or down for long-term market conditions (prospective 6-14 years).  Learn how to make long-term forecasts here.
    • Traders & active investors: steer your stock allocation towards the sectors with the highest forecasted returns
    • Can use individual stocks, just make sure to account for the higher volatility


Section 4: Define Ranges (Min/Max) Around Your Baseline Asset Allocation

  • First, choose the following parameters:
    • Maximum permissible loss on a single position
    • Typical stop-loss
  • Calculate minimum and maximum in each asset class/subclass:
    • Max % = Max Permissible Loss Per Trading Position / (Asset SD * Stop-Loss Multiple)
    • Min % = (-1) * Max %, subject to any other restrictions on short positions
  • Make sure these allocations fit within your risk tolerance
    • Have us run your portfolio through our Trade Analytics Service – we do all these steps for you
    • If you want to do the math yourself: Estimate the expected return and standard deviation of returns, under different scenarios
    • Model with a lognormal probability distribution, and/or run a simulation
    • Sample:
    • Calculate the 1/N percentile of the loss distribution (the loss that occurs 1 in N years)
    • If greater than X, go back and change your baseline asset allocations until they fit within the risk tolerance you defined
  • Check out episode 10 for sample asset allocation ranges.  You’ll find a free, downloadable spreadsheet there.


Section 5: Trade and Invest, Staying Within the Ranges


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Think back to your most successful trades – the ones that made you jump out of your chair and run around the room, high-five your friend, enjoy a celebratory drink, or all of the above.  As traders, we all want more of this kind of trade.  In these moments, we feel like masters of the investment universe!

It takes lots of dedication and practice to achieve mastery, but it is not difficult to get started on the path towards success.  One of the critical first steps is defining what your investment universe will be.  After all, we can’t master something unless we first know what it is we want to master!

I call this mapping your investment universe.  It’s the process of deciding which markets you will follow and analyze, along with making a list of the securities you will trade.


Every Winning Plan Includes a Map of the Universe

In my earliest foundational post, I introduced a framework for building wealth entitled “The Five Components of Successful Investing”.

The five components are the blue boxes in this flowchart, taken from that post (with the blue circle added to mark today’s focus):


While the Universe of Securities box sits to the right of the other blue boxes, because it doesn’t need to be updated as often as the other components of successful investing, all the others depend on it.  We can’t make forecasts unless we have first chosen what types of investments (e.g. stocks, commodities, bonds) we want to forecast!  Also, most of us will use technical analysis of chart patterns to inform our trading decisions, which first requires us to select which charts we want to look at.

So, what should your investment universe be?  The answer is: it depends!  It depends on what YOU like to learn about, follow, and trade.  Some traders prefer to follow one industry, such as tech stocks or retailers, and get to know it in great depth.  These type of traders might define their universe as all the stocks in that sector, including small-cap stocks that they feel comfortable trading given their specialized knowledge.  Their universe might also include options or warrants on these stocks, depending on risk tolerance and other factors.

My approach to trading and investing is more broad than this.  It can be best categorized as “macro investing”.  Macro investing is all about trading a wide variety of assets and investment vehicles with the goal of capitalizing on large-scale trends and cycles.  I might buy a small-cap security if I think there is an opportunity there which aligns with a larger trend, but generally I am trading larger ETFs (exchange-traded funds) that hold a basket of securities in any given area.

I believe that macro investing is the optimal approach for most investors.  Here is why:

  • If your universe includes ALL the major asset classes, you’ll be able to take advantage of the best opportunities to bet alongside or against every area when it is becoming underpriced or overpriced, respectively.
  • Having a larger universe requires you to stay current on all the important trends, which makes you a better-informed trader.
  • Using ETFs as your primary investment vehicle, as opposed to individual stocks, provides better diversification within an asset class.

The exception to this would be if you have the time and desire to do lots of research on individual stocks, above and beyond the larger market trends.  In that case, you’d want to select stocks yourself for better returns and lower risk.  The vast majority of traders simply don’t have the kind of time needed in order to select stocks across many different sectors.

In the remainder of this post, I’ll explain how I map out my universe of securities.  This will serve as an example that you can adapt for your own situation.


Select Asset Classes

As I mentioned above, I try to include all categories of tradable assets in my investment universe.

First, I group them into major asset classes:

  • Currencies;
  • Precious Metals;
  • Commodities;
  • Bonds;
  • Equities (Stocks); and
  • Pure Derivatives.

Next, I further define “subclasses” within many of the asset classes.  For example, beneath Equities (Stocks) I have the ten market sectors (e.g. energy, utilities, financial services) along with mining stocks.  Beneath Commodities, I have: Soft Commodities, Base Metals, Oil, and Natural Gas.

Now that I’ve defined the scope of my universe, I can choose which securities I’ll trade.


Select Securities

To keep it simple, I choose only one preferred investment vehicle within each subclass.  Typically, this will be an ETF that tracks all major components of that subclass.  In some cases, there will be multiple “go-to” choices, as in the Currency Derivatives category where we can use UUP to trade the U.S. dollar, FXE to trade the euro, or FXY to trade the Japanese yen.

My list changes periodically as funds change and new choices become available.  Here is the list as of today:


My investment universe

These are the criteria I use to form the list, in order from highest to lowest priority:

  • Coverage (i.e. low tracking error);
  • High trading volume (i.e. low bid/ask spreads);
  • Low expense ratio;
  • Availability of options;
  • Trading volume in options.

I recommend you use some combination of the above criteria to form your own list, since your priorities might differ from mine.  For example, if you are a very frequent trader of options, the amount of trading volume in options could be your top priority.  In that event, you’d want to entirely remove the ETFs that don’t have high trading volume in options (e.g. DBA, DBB).


Follow Your Map, Unless You Are Absolutely Sure Where You’re Going!

Over 75% of my trading activity is in the ticker symbols found in my list.  I only deviate from the list when at least one of the following conditions hold:

  • I am trying to get more exposure outside the United States markets (e.g. I’m bearish on the dollar or U.S. markets have become overbought).  In this case, I’ll choose a fund with more foreign-listed stocks (like RWX instead of VNQ).  I keep a list of favorites.
  • Or, I’m trading a niche that is only a small piece of a subclass.  For instance, while uranium stocks are part of the energy sector they trade quite differently from the rest of the sector, which is dominated by oil and gas companies.
  • Or, I’ve thoroughly researched a company and am confident enough in my view of that firm that I’m willing to take on company-specific risk by trading it.

In the past, when I’ve strayed from my list by trading in different securities without one of these valid reasons, my results have been mediocre to poor.

I learned this lesson in the FactorShares 2x Gold Bull S&P 500 Bear ETF (FSG), an ETF that, mercifully, no longer exists.  From mid-2011 to mid-2012, this fund extracted over $9k from my account before the pain stopped.  I’d been buying it on the thesis that the ratio of the S&P 500 to gold would decrease.  As we see below ….


… it was a faceplant.  Ouch.  But although the ratio rose instead of falling as I’d expected, I suffered a bigger loss than necessary.  FSG wasn’t in my universe of securities, and I didn’t trade it for any of the three reasons listed above.  I used it because it looked on the surface like it tracked the ratio I wanted to trade.  I’d have been better off creating a synthetic long-short position with GLD and SPY instead of using this ill-contrived fund.

What I discovered later was that FSG was managed terribly.  Factor Capital Management, the managing owner of FSG and 4 similar ETFs, shut down its operations in 2013 and liquidated its funds, but not before:

  • Charging excess expenses above its stated 0.75% fee (already too high) which weren’t clearly disclosed in the fund’s prospectus;
  • Failing to provide required tax forms to investors before March 15 as required by law (I had to amend my taxes in 2012 because of them – what a pain!);
  • Failing to adequately promote its funds, which kept volume low and hurt the fund’s liquidity.

I shared this example because I don’t want to see you fall into the same trap.  Stick to your list of preferred funds only, and don’t deviate unless one of the three conditions in my list is true.

Macro investing can seem like too much to handle.  It can look like the universe is far too vast to navigate.  But make a map, stick to it, and you won’t get lost!  You’ll be ready to pounce on opportunities anywhere they appear, and you’ll be on the path towards mastering your investment universe.

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(CC image by Jim Linwood on Flickr)

(CC image by Jim Linwood on Flickr)


Have you ever been to one of the world’s financial centers – London, New York, Hong Kong, Chicago, to name a few – and seen the huge glass-walled towers full of luxury offices?

When you hear about the massive salaries and bonuses being paid to the high-ranking people inside those offices, which house companies like Goldman Sachs, JP Morgan, Morgan Stanley, Lehman Brothers (rest in peace), Bear Stearns (another RIP, maybe they’re not so smart after all?), PIMCO, Wellington, Edward Jones, and so many more – how does it make you feel?

Certainly, these firms perform many useful functions for large institutional investors, who must maintain portfolios full of thousands of individual securities and file tons of paperwork.

But what about the office down the street in your town?  The branch office that handles the accounts of high net-worth individuals, corporate middle managers, hard-working entrepreneurs and diligent savers from all walks of life.  They work in the brand-new building, drive around luxury cars, and advertise constantly on TV.  They must be doing something really hard to earn all that money, right?

What if I told you that they’re not doing a single thing you can’t do, if you have only:

  • A computer or tablet,
  • The ability to listen to podcasts (a shameless plug for our podcast!) at some point during your week, like during your commute,
  • A minimum of 1-2 hours per week to review your investments (or only per quarter, if you prefer a more “hands-off” approach).

The more time and dedication you’re willing to put in to building these skills, the better your results will be, of course.  But even with just the basics, you can do most of what the “professional” advisors down the block are doing, and you can do it for a much cheaper price.

Even if your portfolio is as high as $10 million, this is within your reach.  You can learn it, and you don’t need to be a math whiz to do so.

Let me illustrate.


The Five Components of Successful Investing

This is the approach I developed to manage my own assets, which I accumulated across 10+ years of working in the corporate world.  Although I’ve developed advanced analytical tools to perform  each one of these steps, this is the overall process I follow.  You can do it too.



Each step will be the foundation for lots and lots of future podcasts and posts.  For now, I’ll introduce the topic by giving just a brief outline of each step.


1. Determine why you’re investing.

Is your goal to have a secure retirement?  To save for your kids’ college?  To leave a legacy for future generations?  To become filthy rich and own 5 Lamborghinis?  No matter how ordinary or ambitious the goals, you need to know what they are.

Your goals impact your risk tolerance as well.  I like to distill the concept of risk tolerance to one sentence to make it easier to think about.  “If my net worth went down by [X%] in a short period of time, I would get very worried about my investments.”  Fill in the [X%] for yourself, it is a personal choice.  Yours might be as low as 2%, or as high as 100%!

Lastly, figure out your liquidity reserve.  That is, how much money you must keep safe and secure because you might need it in the not-too-distant future.  This is an emergency fund for job loss or, if you’re self-employed, a downturn in your business.  Three months, six months, or a year of expenses are common amounts.  Add on any big expenses you know are coming up soon, like a car purchase or down payment on a house.  The total is your liquidity reserve, or how much you absolutely must keep away from potential risk.

2. Develop long-term forecasts.

When it comes to forecasting, you can do all of the work yourself, rely on outside resources like Torpedo Trading, or fall somewhere in between the two extremes.  If you want to develop your own forecasts, you could mimic my comprehensive approach.  I developed my forecasts using: historical returns adjusted for long-term cycles, volatility assumptions, and correlation matrices.  If not, it’s much simpler to tune in to the podcast and follow the blog since you will find the results of all this hard work there, for free!  Alternatively, you could make your own forecasts based on independent research, talking with other investors, your favorite advisory services, astronomical cycles, or whatever you heard on CNBC yesterday.  (OK, not the last two examples.)

I re-evaluate my forecasts about once per quarter, sometimes sooner if there is a major shift in market conditions for a particular asset class.  Trends I define as long-term usually last 10 years or more, so they will not change much.

I chose about 25 asset classes in total, including: the 11 stock sectors, gold, oil, corporate bonds, Treasury bonds, and others.  You could use as few as 6 to 8 and get decent coverage of the investing spectrum.

Once you have a forecasted return and volatility level for each asset class, just put all your money into the one with the highest forecasted return.

JUST KIDDING!  That’s NEVER a good idea because of something called correlation.  Quite simply, correlation is the tendency for two asset classes to move up or down at the same time.  Even if you think bonds will have a lower return than stocks, you still want to include some bonds because they offer you diversification.  During a year in which stocks drop 25%, bonds may lose only 5% or even go up in value.  You might not have sufficient risk tolerance to take a 25% loss, but could absorb a smaller loss.

If you don’t want to be checking your portfolio or trading weekly or monthly, stop here!  Your plan looks like this instead, a shortened version of the one from earlier in this post:


Simply keeping your asset allocation in line with the long-term targets will put you in good position for long-term gains.  Once you’re confident in steps 1 and 2, it’s also enough to feel comfortable putting your advisor out of a job!

On the other hand, if you like to trade and you want the best plan, read on!


3. Develop intermediate-term forecasts.

By intermediate-term, I mean around 6 to 14 months.  I find that to be the typical trend length in most markets.

Intermediate-term cycles operate within longer-term trends, which last from several years to decades.  Aligning yourself with intermediate-term cycles takes more work and involves more risk than simply tracking the slow-moving long-term trends, but offers tremendously higher rewards.

I use a form of intermarket analysis that I developed with inspiration from an acclaimed book by John Murphy.  I also use a few other advanced technical tools to identify likely turning points.  More info on my approach can be found in this blog post.

You’ll use these intermediate-term forecasts to flex your asset allocations up or down from their long-term targets.  For example, you might have set a long-term allocation target of 50% for stocks, but your risk tolerance and goals permit you to vary that percentage in a range between 30% and 70%.  If you’re forecasting an intermediate-term rise in stocks, you would increase your stock holdings towards 70%.  When your forecast changes, anticipating a drop in stocks, you would begin selling stocks down to 30% of your total portfolio.


My current intermediate-term targets. I'm not bullish on stocks or bonds right now.

My current intermediate-term targets (some asset classes have been grouped together here, like all the stock sectors). I’m not bullish on stocks or bonds right now.


4. Be aware of short-term market moves.

Notice I don’t say “develop short-term forecasts” or “watch charts every single day” here.  This would be a full time job by itself.  We’ve all got a life to live!

I’m not opposed to day trading, but it’s foolish to be playing tiny moves in an hourly or shorter chart unless you’ve already got extremely sound intermediate-term and long-term forecasts.  Those moves will always dwarf the short-term oscillations.

If you’re under- or over-weighted in an asset class based on the intermediate term forecast, you’ll be trying to increase or reduce your position in that asset class.  Simply be aware of whether the last few days have trended down or up so you’re buying on a dip or selling on a pop.

I use my live stream and YouTube channel, both of which are free to watch, to keep viewers up-to-date on the latest developments in the financial markets.  Please consider subscribing to be updated when I release new content on those platforms.


5. Choose what you’ll buy and sell from each asset class.

I call this step “mapping your investment universe”.  Learn how it works and see an example here.

I usually recommend the major ETFs because they’re liquid and cost-effective.

It’s certainly appropriate to pick individual securities instead of ETFs here, wherever you feel comfortable doing so.  For example, maybe you work in the health care sector so you keep up on the trends in that area.  Or perhaps you love the latest tech products, and you’ve got a good lead on what will be hot and what won’t.

As part of this step, you’ll also want to consider whether options (calls or puts) are appropriate for you or not.

At Torpedo Trading, we maintain a list of preferred ETFs for each asset class.  The list changes from time to time as the fund companies make changes or add new funds.  This list will be provided to members once our membership program goes live.


More to Come

Stay tuned for future podcasts and posts that will dive much deeper into each of the steps above.  I hope this post will serve as a helpful reference for the overall process and how it works.

I’m here to help you take control of your investments, and avoid being gouged by expensive advisors.  This framework will set you on the path towards success.

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