Short term trading can bring huge profits. Last week I wrote about that and the big advantages of short-term trading.
But many investors are reluctant to trade aggressively. Instead, they joined the “buy and hold” cult.
Now I understand the hesitation of trading. Buy and hold can also be very profitable in the long run. But the problem is that those benefits come with great risks.
Buy and hold is one of the riskiest strategies in existence. Suppose you invested in his index fund in early 2008 and were due to retire in a few months. Over the next year, the financial crisis wiped out more than half the eggs in the nest. It will take ten years or more to recover.
That’s just one example. Bear markets are always unexpected and have a devastating impact on retirement planning.
This risk is why many investors switch part of their portfolio to bonds as they approach retirement. It’s been a great strategy for most of the last 50 years. Bond prices rose as interest rates fell.
Interest rates are likely to rise rather than fall in the coming decades, making bonds more risky today. Common investment tactics that worked well in the past have turned into volatile bets in this environment.
But don’t worry. I’m not here just to list issues. I have practical solutions that will help you beat the market and significantly reduce the risk associated with holding.
Tips for securing large profits with low risk
Certain stocks are the best long-term choices. You may not realize it, but active trading is also a good long-term plan. Combining the two strategies is key to a safe retirement.
One way to do that is to allocate half of your portfolio to index funds. This gives the market a profit. You also take 100% of the market risk.
You can trade with the other half of your account. A simple trading strategy is to buy when price rises above the 200-day moving average (MA) and sell when price falls below the MA.
This strategy is designed to reduce risk and capture most of the upside of the market. A plan like this won’t beat the market, but that’s okay.
Over the past 25 years, MA strategies have captured 76% of buy and hold profits. Risk has been cut in half. Losing just 25% of your account balance is much better than an investor losing his 55% of your funds in 2009.
Now comes the good part…
A trading strategy that reduces risk by 40%
If you put half of your money in the SPDR S&P 500 ETF Trust (NYSE: SPY) and traded the other half in the MA strategy, you would have captured 98% of SPY’s profits. Risk has been reduced by more than 40%. It’s exactly what we look for in a retirement account: big returns and less risk.
Now consider using a strategy like this: trade room. These are short-term strategies that can give you twice as much profit as SPY, or even more.
A more aggressive trading strategy can help you outperform the market.
Also, there is no need to specifically purchase and maintain SPY. If income is important to you, a dividend- and bond-focused Exchange Traded Fund (ETF) is the way to go. You can also hold ETFs that target anything you think will serve your purpose, such as tech, real estate, or emerging markets.
When I write about strategies like this, people ask me why not everyone follows them. One reason is that financial advisers are reluctant to trade. Some firms don’t want their advisors to trade too much, as it could prompt regulatory questions.
Some companies worry that introducing new ideas like trading will make customers uncomfortable. they are right Many people feel uncomfortable with trading strategies.
But trading offers investors the best chance to finance their dream retirement.
Many people do not have enough money to secure their retirement. If they can learn to think differently about investing, as we do every morning in the trade room, they will have the opportunity to accelerate their path to greater returns and enjoy their retirement more.
thank you. Michael Carr Editor, exact profit