CTMPR

One of the best ways for the average investor to beat the market is by selecting an asset allocation and then re-balancing the portfolio at the end of each year.

Most investment advisors recommend keeping the stock portfolio to roughly 100 – your age, so if you are 40 years old you would be in about 60% stocks and that would decline to 40% stocks by the time you reach age 60. If you are more aggressive than average you can bump up your stock numbers and if you are more conservative you can reduce them.

So if you are age 40 here is what a sample portfolio might look like:

U.S. Stocks – 30%
Foreign Stocks – 30%
Bonds – 30%
REITs – 5%
Gold or Silver – 5%

Now, how would you build out an investment portfolio that matched this profile? It would seem to me the easiest way for the average person to do it would be either through “no load” mutual funds or ETFs. In this particular example we are going to use ETFs.

For the U.S. stock portion I would consider splitting up the 30% into 3 different ETFs. These 3 ETFs would track the Dow Jones Industrial Average, The Nasdaq 100 and the Russell 2000. Looking back at data since 1/1988 you can see that these 3 indices have all out-performed the S&P 500 over the past 23 years despite the fact that most money managers compare themselves to the S&P 500. The reason I used January of 1988 as my starting point is because the dust had settled from the huge run up and crash that occurred in 1987.

Here is a chart of the S&P 500 (black bars) compared to the DJIA and the Russell 2000. You can see that both indices have outperformed the S&P over the time frame and the performance gap seems to be widening.

Now, take a look at the same comparison using the Nasdaq instead of the DJIA.

You can clearly see that the Nasdaq has been the best performing of the major stock market indices over the past 23 years. Now, to absolutely blow your mind, I’m going to show you the chart of the Nasdaq 100 which is the largest 100 stocks on the Nasdaq and compare that to the Russell 2000 and the DJIA.

Now, you might think to yourself why not just put the entire U.S. asset allocation into the Nasdaq 100 since that has performed best? Well, the #1 catch phrase when it comes to historical data is that “Past performance does not guarantee future results”. We could be in for a cycle where the S&P 500 outperforms for the next 10 years, no one knows for sure.

Here is a comparison of the past 6 months that shows the Russell 2000 has performed the best during this tremendous rally.

The S&P 500 has also been out-performing the DJIA during this rally.

So it’s best to include several asset classes instead of trying to pick which one will outperform. Therefore, here is an example of how you would structure the U.S. portion of your investment portfolio using an ETF Strategy.

30% – U.S. Stock Allocation
– 10% in DIA (Dow ETF) or SPY – (S&P 500 ETF) or a combination of the two.
– 10% in IWM (Russell 2000 Small Cap ETF)
– 10% in QQQQ (Nasdaq 100 ETF)

By having several classes of stock in your portfolio you will get more benefit from re-balancing. You can see by the long term chart that small cap stocks dramatically under performed in 1999-2002 so you would’ve been buying discounted shares during those years which have soared in recent years.

In the next part we will go through the Foreign and Emerging Market sector of the investment portfolio.

With the run that the stock market has had since last summer it’s natural to start worrying about a severe price correction. After all, many indices are back to the pre-crash levels of 2008 and the Russell 2000 is back to levels not seen since the fall of 2007. Therefore it seemed logical to talk about ways to profit from a correction or at least hedge some portfolio risk.

Over the years there have been many instruments developed that can be used to play both sides of the market or hedge portfolio risk. These include:

Stock Options
Stock index Futures and Options
Single Stock Futures and Options
Short and Leveraged Short ETFs

The leveraged short ETF is becoming one of my favorite ways to play the short side in stocks. I used to use options but there is so much time decay, especially on the short dated options that it’s sometimes hard to stay in the position as long as it’s needed. Therefore, I began looking at the leveraged short ETFs to see if they could provide some of the same benefits.

In this particular piece we are going to focus on the Short Russell 2000 ETFs. There are both the double (2x) and triple (3x) inverse ETFs to choose from.

The Double Short ETF is from ProShares and trades with the ticker symbol TWM. The goal of this fund it to provide a -200% correlation to the daily movement of the Russell 2000 Index. So if the Russell 2000 drops 1% on a given day, then TWM should rise 2%.

TWM is currently trading at $11.58 so even using a 20% stop I would only be risking about $230 on a 100 share position.

The Triple Short ETF is from Direxion and trades under the ticker symbol TZA. The goal of this fund is to provide a -300% correlation to the daily movement of the Russell 2000 Index. So a 1% drop on a given day in the R2K should cause a 3% pop in TZA.

TZA is currently trading at $13.70 so again a 20% stop would only be about $275.

You can see by the chart below that even small corrections in the Russell 2000 can cause significant jumps in TZA.

This chart is from 4/15/2010 to 9/9/2010 and is for illustrative purposes only.

Leveraged ETFs are designed for short term trading and not for long term investing. Please make sure you read the prospectus and understand the risks before you enter a position.

One of the hardest things for beginning investors to learn is that in order to make good money in the markets you need to follow a rigid system. Without a solid system you make too many emotional decisions and they rarely work out in the long run. Whereas, a solid approach that is based on proven methods will often lead to superior returns over time.

There are two crucial elements to successful investing or trading:

#1 – Risk Control (Money Management) – Knowing how big of a position to take in a particular idea or asset class.

#2 – Timing – Knowing when to buy and sell a position

This article will cover a method of timing your entry and exits using the 20,50 and 200 day Simple Moving Averages (SMA). As you can see by the Silver ETF (SLV) chart below when silver really started to run last fall it followed the 20 day SMA very nicely. Before the upside break out it had been bouncing along the 200 day SMA which is often considered to be the ultimate bull or bear indicator.

Source: Barchart.com

As you can see on the left side of the chart SLV tested the 200 day SMA twice and the second time blasted higher closing above all 3 moving averages. Then it left a breakaway gap the following morning. This is a very bullish signal and experienced traders knew it was the beginning of something big. You can see that once the market took off it didn’t test the 20 day SMA for nearly 2 months which is incredible. It followed the 20 day all the way through the end of the year. The market closed below this average the 3rd trading day of January signalling a correction was underway.

Last Thursday the price once again moved above all 3 moving averages. If the 20 day SMA moves back above the 50 day then traders will consider this a renewal of the bull market in silver. If you purchased SLV on a close above the 50 day, you would exit the trade if the market fell below the 20 day SMA again.