For people looking for stock tips, it's important first that you understand about true diversification. The world is driven by money and the price of stock is driven mostly by the ultra rich investors who occasionally move their money in and out of major asset classes. There are various cycles that result as the money will flow to different asset classes. Although in the long run, stocks have gone up 10% per year, it can also be said that other major asset classes show consistent returns at lower risk, while others may show higher returns at higher risk. The reality is that if you are planning for retirement you will need both safety and earnings.
A simple investment in stocks is not enough even if you do diversify among the various stocks. What happens when 70 million baby boomers in the US alone all try to retire at once and they all start to take money out of the stock market? This is why some smart groups of people have used what's known as "age wave" theory which predicted a stock market top in 2008. The theory was that because the majority of the money in the stock market among common folks was owned by baby boomers that people that would get close to retirement would either start selling completely, or start gradually selling stocks and replacing them with more stable return devices such as bonds. Perhaps the bigger problem is that because the "smart money" would be aware of this, they would start selling in bulk to get a jump start ahead of everyone else.
Now with unemployment at a historic high in not only the US, but in Europe and other places around the world, the global economy is under stress. However, there's really no reason to fear, if money goes out of the stock market, it can only go into some place else.
Here are some places it can go:
Bonds/Treasuries
Cash/Currency
Gold/Silver/Precious metals
Stocks/Options/Futures/Paper assets
It can also go into real estate, however real estate is a highly unique asset class. Real estate is based on leverage and is highly unique because as people put money into real estate they actually increase the amount of leverage. They might put 100,000 down to own a million dollar property, but that million dollars will need some place to go. So while owning real estate is certainly it's own asset class, it actually creates a significant amount more currency that either will remain in currency, or go to one of the other asset classes. Additionally you need somewhere to live so if real estate is under demand and you have your own house, you will then have a very large portion of your wealth already invested into your home.
In the last 10 years, if you simply put all your money in an S&P index fund, you would be down about 14%. In reality many people are down more than that because they continued to put money in as stocks went up and as the economy was good as they had more money to put in then. This results in the bulk of the common folks money going in right at the top, while having less to invest when the markets go lower. Many people would consider an S&P index fund as VERY diversified as it contains all sorts of stocks. The problem is, the S&P index is several stocks and only stocks. While it is diversified among the paper asset class as it may be invested in several sectors (which I agree is a good safe practice among stocks), it is not diversified among the other asset classes mentioned above
What if you put 20% into each of the asset classes above? In that same time period you would be up over 50%.
However, your portfolio of stocks should only represent maybe 20% of all of your wealth.
In the past it was extremely difficult for the average person to protect themselves by owning multiple asset classes. Some people owned their own home, while owning stocks, but today there are ETFs of all sorts. Here are some ETFs to consider owning within each asset class.
Bonds/Treasuries there are ETFs like SHY which you can use.
Cash/Currency - you should have some cash on the side, but also consider owning some Australian dollars and Canadian dollars. Australian ETF EWA, FXC
Gold/Silver/Precious metals GLD, SLV
Oil/Gas/Commodities USO, UNG,
Stocks/Options/Futures/Paper assets - You can own the S&P index fund SPY. I prefer this over any other mutual fund since fund managers are simply trying to match their benchmark which is the S&P. This avoids all of the large fees that so many mutual funds collect and represents a more pure diversified play in this asset class.
After diversifying within each asset class, you could consider taking each asset class and diversify among that asset class if you want to be more sophisticated. Something like this would work fine.
- Basic Materials: 10%
- Consumer Goods: 10%
- Financial: 10%
- Healthcare: 10%
- Industrial Goods: 10%
- Service: 10%
- Technology: 10%
- Utilities: 10%
- Cash: 20%
There are ETFs for each of the above categories. If you want to get even more sophisticated, you can select the top stocks among each sector within that particular asset class. As you learn more sophistication you can learn hedging techniques to actually bet against a particular sector using inverse ETFs. As you continue to diversify your wealth, you can continue to put more money in these asset classes using your 401k and IRA as your retirement vehicle to take advantage of the tax benefits and legally avoid much of everyone's largest expense.
The trick is occasionally, maybe every 3 or 4 months of the year you need to re-balance your portfolio to prevent gains and losses from offsetting your diversification and balance among your portfolio. So maybe you had 100k and put 20k in each asset class. Maybe you gained some more cash along with gaining value from your bets in the Australian dollar, and perhaps gold is up so that you have 25k in each of those asset classes. Then you may have only 17k in the stocks asset class. It would be important to sell. Putting 20% in each asset class keeps your stock trading simple and gives you some peace of mind knowing that your wealth is safe.
If you invest in every asset class evenly, you should not only protect your wealth but grow it. This requires being able to invest dynamically while diversifying. This means that you will use clear signals at any given point to shift the balance of your diversified portfolio in your favor. So if you foresee some inflation, you would put much more of your cash in EWA and FXC to bet against the dollar, and you would buy more than 20% in the commodities and precious metals asset classes. You would remain diversified, however you would allocate a larger percentage of each individual fund into specific areas based on your outlook which can be developed using thorough research. If you really want to grow it, you need individual stock tips. A way to trade individual stocks is to come up with a trading system.
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