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Every
day you are in the stock market you have your capital at risk. Some
products, like index funds, reduce that risk through horizontal
diversification. But they can't protect you from a down market which can
bring down all asset classes simultaneously. What is
needed is vertical diversification; adding an element to your portfolio
that is uncorrelated and doesn't necessarily move in the same direction
as the market. Our programs are uncorrelated with the market and
can work to reduce overall risk in a larger portfolio while being
excellent programs on their own.
The reduction of risk is a
critical element of our programs, and risk is directly tied to market
exposure. When comparing any investment to the market you need to look
at the sum of the daily changes of that investment, up or down, and
compare that to the sum of the market's changes. We offer four programs
with varying levels of risk to match the requirements of individual
investors. Since our approach is statistical there are times when the
next day's direction is just too close to call so we move to the money
market to avoid risk.
Actual trading is not the
same as hypothetical trading, because of this, our Primary program was
developed while using real money in our personal accounts to track the actual progress for over
five years prior to release. This was
a long process as you can see from our historical comments stretching
back well over those five years. Newer programs are also tracked using
real money. It did not matter that we did not charge ourselves fees
because a value judgment must be made as to whether the returns are high
enough to both cover the fees and show strong returns. When those criteria
are met we move forward knowing full well that there is always a risk of
loss.
There are no
commissions associated with trading these funds and they trade at net
asset value (bid price = asked price), so there is no slippage. We use
the Rydex 2x strategy funds which move at about twice the rate of the
S&P500 or Nasdaq 100. This doubles the risk and doubles the reward if you
look at a single day's results. When considering a number of
transactions over time this risk decreases as we are in the money market
a significant portion of the time.
The Rydex 2x strategy funds that
we use for our transactions actually trade twice a day. This
offers us the opportunity to make an adjustment after the first hour of
trading when we deem it necessary.
Understand the difference
between genius and a bull market. When comparing any two methods in
investing or science the method with the larger sample size (greatest
number of separate transactions or decisions) will be the most reliable
when projecting into the future. But future conditions will always
differ somewhat from the present and present a level of risk.
The
Prudent Man Rule is a common law standard applied by the courts
to the investment of trust funds. When the original prudent man rule was
introduced many years ago it referred to the type of investing that a
prudent man would undertake. This prudent investor was someone who would
invest in bonds and dividend paying stocks of solid companies that had
low debt and a history of being in business a substantial number of
years. When modern portfolio theory came into being it recognized that a
portfolio must be looked at as a system and not as individual
components.
What
might be a risky investment by itself or in some portfolios, could be a
prudent investment when it is part of an overall investment plan in a
different portfolio. In general, a plan that utilizes both vertical
(uncorrelated) diversification as well as horizontal diversification is
more prudent than one that only offers horizontal diversification --
provided the components are based upon sound principles to begin with.
Remember,
all investment involve risks. Past performance is
not a guarantee of future performance. You must try to avoid the
risks you can avoid, and minimize those you can't. Diversify your
investments both horizontally and vertically. Don't take claims at face
value and don't be pressured into an investment. Understand what
you are investing in and make sure it makes sense to you.
Here
are links to the prospectus of the Rydex funds that we use. Leveraged
funds have additional risks that are addressed in these brochures http://www.guggenheiminvestments.com/mutual-funds/products#equity-leveraged
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