Learning From Past Mistakes

I have had some interesting email exchanges with reader Tad, who was kind enough to share some of his experiences:

Yeah, I understand, “analysis paralysis” we used to say. I am a math nut, what can I say…. sorry…. I have managed my own money since 1984 and had done extremely well, until last year. Can’t do anything about the past, except learn from it.

As to your clarification request. Basically, please correct me if I am wrong, if you have over $500,000, which I do (if I would have been following you instead of Bob Brinker and Ken Heebner), I would have at least 3 times what I do now, but I have seen the light, I hope… you advise to pick 5 to 8 broadly diversified funds, your first buy should be 1/3 of a fund, if it goes up 5% (buy percent), if the trend continues the next day, buy the next third, if that goes up another 5%, if the trend continues the next day, buy the final third.

If readers do that and then decide to arbitrarily increase the sell stops, due primarily to higher betas, they are taking on more risk of losing money in those buys. Ergo, to offset that risk, you could increase the 5% above to correlate more with ones increased sell stop. Please see my attached plan. It has evolved and I have made some mistakes, but I am a newbie to your system, and always trying to learn and improve my returns.

I strongly believe that eventually all sell stops will hit and I will be in cash again and when I start buying again, I want to have improved. If you have already gone down this path, please let me know. Constantly trying to do better.

Let me clarify a few items. The incremental buying procedure (1/3 at a time) does not depend on the amount of money you have to invest. To me, it is strictly a reflection of the risk tolerance of an individual.

For example, if you are the aggressive type you can, at the beginning of a buy cycle, allocate 100% of your portfolio. The downside is that, if the market goes against you right away, you lose about 7% using the trailing sell stop discipline.

If that potential loss does not sit well with you, invest only 50%, which reduces the risk to about 3.5% of portfolio. Or, if you are the conservative type, use the incremental buying procedure by starting out with only 33% portfolio exposure, which reduces your potential loss to about 2.5%. That’s how you should determine the amount of money you are willing to allocate once a buy is triggered.

No matter where you fit in, you can further reduce risk by using lower beta funds/ETFs, which will move less than the overall market as measured by the S&P; 500. While this will limit upside potential, it will also reduce possible whip-saws when the markets correct.

All these decisions are not a matter of right or wrong but merely one of preference depending on your risk appetite.

And last not least, eventually all sell stops will get triggered and therefore guarantee a move back to money market.

The longer it takes to get there while the trend is up, the more profits will have accumulated. In that case, the sell stop will no longer function as a measure to limit your losses but to lock in your profits. And that’s a good thing.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.

Comments are closed.



Learning From Past Mistakes

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.