• Five Steps to Beating the Markets

  • 5stepsbeatmarketsStudies show you can dramatically boost your performance and potentially beat the stock market by following five simple rules.

    Those five rules are:

    1. Set goals and monitor your progress.
    2. Concentrate your assets.
    3. Structure your portfolio and re-balance at least yearly.
    4. Use trailing stops to limit risk.
    5. Don’t chase the train if it’s already left the station.

    Rule No. 1: Set Goals and Monitor Your Progress:

    Most investors have no understanding of where they’ve been – let alone where they want to be. So start out by figuring out where you want to wind up. Then craft a plan that helps you get there.

    For instance, if you really want above-average income, don’t waste your time with growth-only choices. Various studies show that taking advantage of incremental gains over many positions can add up to more than any home run long-term hold and minimizes market risk.

    Similarly, if data shows that 75% of the world’s economic activity now takes place outside U.S. borders, investors who have only 6% of their holdings in international stocks will end up with a substandard portfolio. For decades, we’ve heard over and over how international investments should comprise 5%, 10% or at most 15% of our portfolio’s total value. Any more than that is foolhardy and risky, the pundits tell us.

    Rule No. 2: Concentrate Your Assets:

    Many investors are familiar with the concept of “diversification”- or, at least the form that Wall Street practices. Common wisdom tells you to spread your assets around, reasoning that this will protect you from a single catastrophic loss. But that’s actually akin to rearranging the deck chairs on the Titanic. No wonder investing icon Warren Buffett reportedly quipped that “diversification is for people who don’t know what they are doing.”

    Like Buffett, I think it’s far more important to concentrate your assets. In doing so, you’re investing in a more limited list of things that you can better understand, keep tabs on, and react to. That also suggests that you’re investing in the certainty of projected returns, rather than trying to protect your money against things you can’t control in the first place.

    That’s why investing in globally unstoppable trends with literally trillions of dollars behind them.

    Rule No. 3: Structure Your Portfolio and Re-balance Regularly:

    Most investors get caught up in one of two extremes. Either they “over-manage” their portfolios, and wind up trying to maneuver through every possible swing, shimmy, and shake the market throws at them – usually with limited success. Or they don’t pay any attention whatsoever – and when they finally do examine their statements.

    To properly structure your assets, consider a simple, proven model – such as a proven set of disciplines that seasoned market traders are following and has delivered ongoing success is critical.

    There’s another benefit, too. When used properly, a disciplined strategy ensures that you achieve the three goals that are common to all successful investors. In short, you:

    • Maintain discipline – in an automated way.
    • Generate higher-than-average income.
    • And achieve a greater overall stability for your portfolio.

    Rule No. 4: Use Trailing Stops to Limit Risk:

    Think of it as a plumber would. Big losses – like water in your living room from a broken pipe – are expensive and tough to recover from. They can set you back years, which is why it’s best not to incur them in the first place.

    Instead, do what the world’s most successful investors do – focus the majority of your efforts on avoiding losses in the first place. Success here will really make a difference, especially when you consider that most investors have been halved twice in the last decade – once from 2000-2003 and again from 2007-2009.

    The simplest way to avoid catastrophic losses is through the use of protective puts or trailing stop-losses (find out more about protective put through Options trading).

    Trailing stops work in one of two ways. You can set them at a certain percentage or absolute dollar amount below your purchase price when you first buy a stock or other security. And if that stock starts to run, you can “slide” it up, and keep it at a certain percentage below the current price.

    In either case, the “stop” establishes a certain price at which you will “exit” the position – automatically and with no questions asked.

    With today’s technology, there’s simply no excuse for not employing trailing stops as a means of protecting your savings. Almost every broker now offers software or the online capability to easily establish and monitor your investments, including the use of trailing stops.

    Rule No. 5: Don’t Chase the Train If It’s Already Left the Station:

    Most investors have an uncanny knack for doing exactly the wrong thing at precisely the worst possible moment – meaning they buy or sell at times that inflict the greatest amount of financial damage on themselves. That’s why it’s well documented that investors sell at market bottoms and buy when things have already run up (and are ready to reverse).

    Given human nature, that’s completely normal.

    But that doesn’t mean you can’t avoid such emotional pitfalls in your own investing.

    Remember, all investments contain risk. But by following the five simple rules outlined can go a long way to ensuring a healthier, more profitable portfolio that’s capable of generating market-beating returns.