Category: Traders’ Secrets

Traders’ Secrets is something that everyone would like to know, right?
How is it possible that some traders are successful all the time while others fail to make a profit all the time?
That is exactly what Traders’ Secrets will show you.
Traders-Paradise’s team reveal all trading and investing secrets to you, our visitors.

What will you find here?

How to find, buy, trade stocks, currencies, cryptos. You’ll find here what are the best strategies you can use, all with full explanation and examples.
Traders-Paradise gives you, our readers, this unique chance to uncover and fully understand everything and anything about trading and investing. The material presented here is originated from the experience of many executed trades, many mistakes made by traders and investors but written on the way that teaches you how to avoid these mistakes.

Moreover, here you’ll find some rare techniques and strategies that are successful forever, for any market condition. Also, how to trade with a little money and gain consistent returns. By following these posts you’ll e able to trade with greater success. You’ll increase your profits and your wealth, of course.

The main secret of Traders’ Secrets is that there shouldn’t be any secret for traders and investors. Rise up your trade by reading these posts, articles, and analyses!

You’ll enjoy every word written here. Moreover, after all, your trading and investing knowledge will be more extensive and effective.

Traders’ Secrets will arm you with those skills, so you’ll never have a losing trade again.

Lazy Portfolio – How to Make Wealth With Minimum Engagement

A lazy portfolio is a diversified portfolio that allows you to grow your wealth without stress or a lot of work.
There is no active trading, no monitoring your stocks every day, and no paying to handle your money.

Let’s make clear what’s a lazy portfolio? In short, the lazy portfolio is passively managed, low-cost, diversified and tracks an index.

Actually, a lazy portfolio is a simple set-it-&-forget-it strategy. It requires a minimum of maintenance so we can easily say it is a passive investing strategy. Due to its nature, it is suitable for long-term investors. In essence, it is a buy&hold strategy that working very well for investors that feel fears when they have to make investing decisions. Even more, this strategy provides investors to avoid greed, maybe the most dangerous feeling in the stock market.

The lazy portfolio isn’t only for lazy investors, this has to be clear. It is for investors who want to avoid high risks while investing. We will introduce some of the best lazy portfolios that could provide above-average returns with below-average risks.

How to recognize the best lazy portfolio?

Actually, it is yours, the one that you maintenance. Each investor has its own style of managing, a different approach, so the way of investing is absolutely individual. But the goal is the same – to outperform the market and generate the highest-as-possible returns.

In most cases, a lazy portfolio can do that. Even Warren Buffett believes in a lazy portfolio, you can ask him. Also, many other successful investors built a lazy portfolio instead of fancy strategies.

But in most cases, a lazy portfolio will not give you to time the market, or to beat it. Also, it will never give you a chance to pick individual stocks but, at the same time, it is low-cost and loaded with fewer fees.

A selection that makes money

Index funds are a good choice as being less volatile. Well, you will not earn your money fast but you could stay in the market for a long time, over 10 years, for example. And you’ll make a profit.

Index investing is essential for laziness. Trust us. You don’t need to actively manage ETFs. What you have to do is to choose among several different recipes but generally, they come into three categories:

Two-fund portfolios
Three-fund portfolios
Four-fund portfolios

Two-fund portfolio

A two-fund portfolio is suitable for investors who want an easy asset allocation portfolio. The two-fund portfolio is built of one fixed-income fund and one equity index fund. You will find your selections depending on the asset class and asset type.

It easy to create a two-fund portfolio.

There are almost 2,000 ETFs out there and you can pick any of them.

First, decide which assets you need. Stocks and bonds are of the core asset classes and your lazy two-fund portfolio will need them. Stocks perform well when the economy is good. But, bonds will protect your portfolio from market uncertainty. Of course, you don’t need to hold stocks and bonds, you can choose something else, as we said.

If you are a very lazy investor your two-fund portfolio could be consists of 60% of total world stock index fund or ETF and 40% of US diversified bond index fund or ETF, for example.

Three-fund portfolio

A three-fund portfolio is composed of only three assets. They are usually low-cost index funds. It requires very little maintenance on your part and that’s why it is another example of a lazy portfolio.

It is a pure 60/40 rule. This one recommends investing in international index funds and stock market index funds. For example, according to Taylor Larimore, an advocate of holding investing simple, all you need is to handle with three mutual funds. That will require an hour per year managing your money, he said. You may diversify your three-fund portfolio on 40% of bonds, 42% of stocks and 18% global stocks. According to some experts, it is the best proportion.

Four-fund portfolio

The best example of this kind of lazy portfolios maybe is Dr. Bernstein’s “No-Brainer” lazy portfolio.

Dr. William Bernstein wrote “The Intelligent Asset Allocator” and “The Birth of Plenty”. He has promoted the capability of the index fund over individual stocks and bonds.

One portfolio that he proposed in “The Intelligent Asset Allocator” is named the “No-Brainer” portfolio. It is composed of 4 equal funds: 25% bonds, 25% global stocks, 25% US stocks and 25% small-cap US stocks. No-brainer indeed.

But this portfolio will give you a chance to diversify the risk over time.

If you are smart, you can be lazy

You will show you are a really clever investor if you set up all of your buying to be automatic. For that, you will need SIP – a systematic investment plan. Mutual fund or brokerage could help you with this. In this way, you will lessen the risks of market fluctuations. Moreover, this will provide you invest a fixed sum in a mutual fund plan at regular periods. For example, you can invest $500 in a mutual fund each month. It is a helpful tool.

Manage no-load funds

As we said, a no-brainer is really good. If you use no-load funds for your lazy portfolio you will avoid sales charges, so-called loads. Well, to make this clear. You are dealing with mutual funds and it is quite possible to do all the necessary things related to your portfolio and investments, yourself. So, why should you pay any additional fees? The point is to keep your cost low to boost your returns, right?

Rebalance your lazy portfolio

Re-balancing a lazy portfolio is simply turning the current investment allocations back to the initial investment allocations. So, you will need to buy or sell shares to bring back the allocation percentages into the initial balance.

Re-balancing is important maintenance and you should do it periodically, for example, once per year. Well, there is always a possibility with, for example with mutual funds, to set up automatic rebalancing.

Advantages of a lazy portfolio

Lazy investing could be the best way to invest. First of all, it is simple Holding just a few funds makes things easier. Further, it is low-cost investing since you don’t need to pay any fees for trading, managers, etc. If you build a lazy portfolio you just have to buy some cheap assets and voila. But the most important feature is the diversification. You can hold thousands of stocks and bonds with just several investments.

Disadvantages of a lazy portfolio

It isn’t easy to find some disadvantages, but there are some things to consider before starting.

One of them is tax-loss harvesting. if investing with 2 or 3 funds, you might miss out on some tax-loss harvesting possibilities. The other problem is the lack of customization. You can’t customize a lazy portfolio like you can with others. But that is the point, to keep it simple. Simplicity is the amazing part of it.

17th January 2020
7Twelve Portfolio – Craig Israelsen Strategy

The Israelsen 7Twelve is intended to protect the portfolio against losses. The portfolio has 7 different asset classes and 12 different funds. Each fund has the same weight of 8.3% or 1/12 of the overall portfolio.

7Twelve, a multi-asset balanced portfolio, is developed by Craig Israelsen, Ph.D. in 2008, today he is a principal at Target Date Analytics. As a difference from a traditional two-asset 60/40 balanced fund, the 7Twelve strategy covers various asset classes in an investment portfolio. The purpose is to improve performance and reduce risk. This represents a totally new school of a balanced portfolio.

The number 7 describes the number of asset classes proposed to add to your portfolio. The number 12 (twelve) outlines the number of separated mutual funds that fully represents the 7 asset classes in your portfolio.

The roots

Craig Israelsen was a teaching family finance at Brigham Young University. One day he got an interesting question: What should be in a diversified portfolio? Even if he thought how the question is interesting, Israelsen didn’t have the right answer at that very moment. The subject was so provocative that Israelsen developed a unique formula for portfolio diversification. It was 2008.

which has been catching on with financial planners. The name 7Twelve Portfolio came from Israelsen himself.

The reason is simple. His new portfolio consists of 12 equal parts of mutual funds pulled from seven fund types: real estate, natural resources, U.S. equity, non-U.S. equity, U.S. bonds, non-U.S. bonds, and cash. But it was the first version based on historical data to 1970. Later, as the markets changed, he added U.S. midcap, emerging markets, natural resources, inflation-protected bonds, and non-U.S. bond funds.

7Twelve strategy

Each mutual fund in the 7Twelve strategy is equally weighted and represents 1/12th of the portfolio. This allocation is managed by adjusting the portfolio back to equal parts monthly, quarterly or annually.

7Twelve model is the “core” of an investment portfolio. Any investor may add individualized assets around the core. But one thing is obvious, using 7Twelve can improve the efficiency and the portfolio performance for the investor because it is a strategic model and doesn’t rely on tactical moves or changes.

Investing by using 7Twelve strategy

There are some statistical data that support the idea of how Israelsen’s portfolio model is better than traditional. For example, if we observe the Vanguard Balanced Index fund (consists of 60% U.S. stocks and 40% U.S. bonds) from 1999 to the end of 2014, we will find that it had an average annual compound return of 5.7%. In the same period, the 7Twelve portfolio would return 7.6%, as Israelsen calculated it. The result showed that the 7Twelve portfolio had smaller losses in bad years, and that is the point of a well-diversified portfolio, right?

Some experts argued with Israelson, claiming that he made 7Twelve by back-testing which allocations have had the best performances in the recent past. If yes, why and how would he equally weight assets? In such a case, the returns would be different.

The value of 7Twelve is its simplicity. Actually, it can be easily adjusted for each investor individually.

The advantages

7Twelve portfolio gives a wide diversification because all known asset classes are covered. So, you can get excellent diversification across many asset classes. Simplicity is a great part. It is so easy to follow 12 funds or ETFs, equal-weighted. Moreover, this model is one of the rare that includes mid-cap stocks. Maybe the most useful part is a great opportunity for rebalancing monthly, quarterly or annually. That possibility is giving reduced risk and increased returns.

Rebalancing the 7Twelve Portfolio

Rebalancing is an important part of the 7Twelve plan. It is very simple. All you have to do is bringing each of the 12 funds in your particular 7Twelve model back to their given allocation (1/12 or 8.33% in the core 7Twelve model).

For example, if you had some funds that performed better in the, let’s say the prior quarter, just deposit more into the funds that were underperformed in the same quarter. In this way, you are rebalancing the account of all funds in your portfolio. That is how you have to manage your portfolio, without emotions.

Let’s say your investment 7Twelve portfolio is $10.000 worth. If you don’t re-balance it, you will lose 13 bps over 20 years. That is empirical evidence. In money, it is almost $920.

The full info you can find HERE

It is a strategic portfolio. All you have to do is to set the percentages and rebalance them when they get out of balance. And you can stay relaxed until some market events ask for you to rebalance. Generally, a good idea. Just view this portfolio graphically.

Bottom line

Every single investor would admit that diversified investing is a great and ultimate thing for everyone in the market. But the reality shows that the ordinary investor hasn’t too much experience in building a diversified investment portfolio. Most investors are holding a portfolio of several mutual funds. That isn’t diversification. 7Twelve provides investors the possibility to build a diversified, multi-asset portfolio.

In many articles and books, Craig Israelsen explained how simple it is to maintain a strong portfolio with a plan. And it is. Moreover, it provides investors to reduce risks of investing.

The deeply diversified portfolio avoids losses efficiently, decreasing the usual deviation of return, and frequency of losses. A well-diversified non-correlated portfolio provides a good return and low volatility.

What people don’t like about 7Twelve? Firstly, some think there are too many commodities.

Secondly, some stated that this strategy is boring. Investors who like to check their portfolios every hour a diversified portfolio could be. The same comes to investors that like to detail-manage their investment. But no one says this is an unreasonable portfolio. Contrary. Literally, you can find plenty of good portfolios and this is one of them. The main problem is that only a small number of investors have been using this portfolio for a long time despite the fact it is created more than 10 years ago.

The most important thing is to choose one and stick with it, through the highs and deeps.

16th January 2020
Microcap Stocks – Recognize The Risks And Get The Rewards

The main difference between a microcap stock and other stocks is the amount of reliable publicly-available data about the company but potential growth can be great in the long run.

The microcap stocks can be riskier, sometimes significantly than other assets. A lot of them are traded over the counter. They are not in the investors’ focus so, due to the lower demand, the prices of microcap stocks are cheaper. Since they are OTC traded they do not have to match the listing standards created to protect investors. Microcap stocks are relatively anonymous and whoever wants to invest in them has to follow very closely.

Microcap stocks are viewed as risky investments for a reason. They often belong to the corpus of new companies in the beginning stage, so it can be difficult to gauge how successful they can be in the market. Firstly due to the fact they don’t have historical data for investors to examine. Moreover, this lack of data may increase the risk of fraud.

But the favorite Wall Street maxim is: “The higher the risk, the greater the reward.”

That is true, especially for the microcap stocks. Because these companies are small and their stock prices are low, they can be a great potential for growth and great returns.

The risks of investing in microcap stocks

Investing in microcap stocks is connected to numerous difficulties. Finding some to research is the last in the list of many challenges. First of all, there is a lack of historical data and you have to be prepared for more hands-on methods and additional work. For large and midcap stocks you can find a lot of valuable data, even for the smallcap stocks. Well, investing in microcap stocks requires deeper digging. But if you do your homework well you can expect a handsome reward.

The additional risks come with a lack of liquidity.

How to deal with it when buying the stock?

Let’s examine the following situation.

For microcap stocks, the price is low, the volume is small. So, when most of the sellers sold their microcap holdings, liquidity will dry up. So, the interest of buyers becomes smaller. But this is the right time to buy them.

Management of microcap companies often meets tremendous challenges in bringing liquidity to the company’s stock.
Generally, microcap stocks have a liquidity problem.

And everyone in the company would like trading volumes to increase. The question is how to reach the investors and increase liquidity. Maybe the main problem for those companies is that Wall Street isn’t interested in them. Let’s be honest. Microcap companies are under their radar.
This could be one of the reasons why most investors don’t invest in microcap stocks. Well, when you invest in stocks with high liquidity you expect they are highly efficient. Your transactions will be executed in seconds and your returns will be at best average.

That’s the problem, where is the possibility?

Microcap stocks are companies whose market value is usually between $50 million to $300 million. If you are looking for additional long-term investment they could be the right choice. Even if you are building your wealth by investing in large-cap stocks microcap stocks could provide you a good mix in your portfolios.

Microcap stocks are less followed but offer benefits. They offer higher returns over the long run. Microcap stocks have the high-returning quality combined with greater alpha potential.

Let’s say, small companies tend to outperform large companies over the long-term. For example, in the past several decades, from the 1970s, they have outperformed large-cap stocks by more than 1% annually. Speaking about higher alpha, you must know that less investor attention leads to greater chances to recognize quality, growing companies before they have been identified by the market.

Microcap stocks can have powerful roles in asset allocation.

They offer many of the benefits such as access to early-stage, high-growth companies. Moreover, they do that with higher liquidity and transparency than private equity, for instance. Also, microcaps don’t have a problem with valuations and a lack of deal flow.

Furthermore, a microcap can be a complete strategy that fills out the rest of an investor’s equity allocation.

In comparison with larger companies, microcap stocks have a better spot when it comes to growth. Hey, you are investing in microcap stocks because of a chance to get in the market before a company bounces and skyrockets. The only way to go with them is up. We suppose you will pick a successful company, though. When the company you invested in growing, you will profit.

Diversification is important because it provides to spread out the risk. A diversified portfolio will give you some protection from market volatility. Never miss out on the chance to invest in different kinds of assets. By investing in microcap stocks, you can create balance in your investment portfolio.

Benefits of microcap stocks investing

If you are seeking market outperformance you will have it by investing in microcap stocks.

First of all, they may give unlimited growth potential. Well, some of the famous companies, started as microcaps. And, honestly, that is the pure beauty of investing. Finding a small company and watch how it is growing over time. That is the privilege. Your stocks were almost worthless when you bought them but look at them now! You were smart enough to recognize the potential. Great! Small companies have more space to grow. Find the one like this and you will have great returns.

Further, follow the example of Warren Buffett. As a young investor (everyone knows this story) he was buying by the market undervalued stocks. If you are familiar with the efficient market hypothesis, you may think that stocks are fairly valued by the market. Well, they are, theoretically.

But this is not the case in micro-cap investing. Because micro-cap companies are almost unknown and generally below the radar of big investors, you can buy them at a discount. What do you think about this advantage against other investors?

The additional advantage appears here with investing in microcap stocks. Micro-cap companies are very often (when they are successful) acquisition targets. The truth is, the majority of small companies never become corporations because some big sharks bought them. For investors, it is a jackpot.

On the other hand, micro-cap companies are really focused on their long-term outlooks. Their businesses are efficient and sustainable with great growth potential. This feature can serve as a winning acquisition target.

Bottom line

The downside of holding microcap stocks is their selling.

Selling a microcap stock can make you feel like you are doing something illegal. You can meet discrimination and refusals and sometimes it’s so hard for holders to find a buyer.
Microcap stocks, sometimes called penny stocks, trade below $1 per share or in the best scenario up to $5. Their market cap is less than $100 million. But, if you really want to start investing and enter the stock market but don’t have a lot of money, microcap stocks are a great opportunity.
As you can see, microcap stocks offer the potential for a notable upside. It can be a fuel for charging your portfolio. But before you jump in microcap investing, it is important to realize the risks of microcap stock investing.

For the first time, they should be a smaller part of your portfolio due to the risks and volatility.

15th January 2020
Risks Of Investing In The Stock Market And Strategies to Avoid Them

Investing in stocks is a risky game. On some of them, you can have full or partial control.

Risks of Investing in the stock market is a necessary part of investing. If investors want great returns, it is necessary to take great risks. However, the greater risks will not guarantee you will have greater returns. So, additional risks will not always bring you huge returns. But if you are long-term-type investors, you must understand that there will be some periods of underperformance in the investments. And you have to be prepared for that and not panic. If you cannot handle your emotions while investing you are likely to have a smaller chance in the stock market. Taking a risk means to have a higher tolerance for risk. Well, if you are not comfortable with it, you will probably make lower returns. But one thing is in your favor – you will never make great losses.

Anyway, you must understand that there is a necessary trade-off between investment and risk. Greater returns are linked with risks of price changes.

So, it is crucial to decide what is your risk tolerance and you have to do so before you enter the stock market.

What do you want: to protect your initial capital or you are ready for a wild ride with all the ups and downs in the stock market to reach higher returns?
If you can take a low or zero portion of the risk, be prepared that your returns will also be very low. On the other hand, if some investment generates huge returns, think twice is there some high risk you cannot accept.

High-risk investments require to hold a position for a long time, not less than 5 years. Do you have a stomach for that? Why the time matter?

As an investor, you must have the capacity to hold it longer to give shorter-term issues time to fix themselves. But remember, higher levels of risks will not always result in high returns.

There are special risks which investors should be aware of.

What are the risks of investing in the stock market?

We will point on some of them. The risk can be a capital loss. Let’s say you picked up some stock of the company with suddenly poor performing and the market recognizes it as negative. The consequence is that stock price could drop, a lot under the price you paid for them. The stock may even end up worthless. Zero! In such a case, the company’s stock will not trade. Moreover, the company may be delisted.

Further, there is always volatility risk. Stocks are volatile assets, their price may shift significantly in price in a short time. And, also, there is an exceptional market risk influenced by external factors. In such circumstances, the whole market could decline and the stock prices will be affected too. Also, not the whole market has to decline but the sector could. For example, a specific sector may experience downturns. Well, while some will catch the losses but at the same time, such periods are a great chance to buy stocks at a lower price. You see, the stock market is a zero-sum game. You can profit only when some others lose.

Also, the risks of investing in the stock market could come from the nature of the stock. To be honest, the stock price is extremely sensitive to bad news or investors’ sentiment toward some companies. For example, the company issued a poor earnings report or published management changes. The investors may disagree with that and could start selling the stocks.

Very specific risks of investing in the stock market may appear if you try to sell or buy stocks at the wrong time. You must have the right entry but more important, you must have a great exit. The last is the hardest part of the stock market but doesn’t have to be. Check HERE.

As we said, these are just a few risks you can meet while investing in the stock market. The crucial part is to understand what kind of risks you may have with your investments and how you can handle them.

Strategies to avoid risks of investing

Frankly, it’s impossible to entirely avoid risks. What you as an investor can do is put them under control. Actually, you can control your exposure to risks to the agreeable level. The risk you can handle and want to take. For that to do you have to know exactly what are you investing in and identify the possible issues all of these before entering the market and buying a stock. When you identify the risks involved you’ll be able to handle them.

How to manage the risks?

Firstly, define your investment goals, risk tolerance, and limitations, and plan according to what you found. Invest only in a sector that carries a lower risk than you are prepared to take. Go below your possibilities when it comes to risks.

The other solution is a diversified investment portfolio. It will give you good support. Your investment portfolio must contain several different assets. Spread your investments on bonds, utilities, mutual funds, cash, along with the stocks. Never put your whole capital into one single investment.

Combine them, long-term investment, short-term, but be careful about changes in your fundamental investment.

Also, a good decision could be to add derivatives to your portfolio. You can use them as a hedge against the risk. For example, the stock price is dropping, instead of selling them you can avoid losses by shorting futures. Of course, you have to choose futures of underlying assets that match your holdings. The hard part here is the value of futures compared to your stock portfolio. Exchange-traded futures have standard sizes of the contract. Hence, sometimes they will not give you a perfect hedge and you can over-hedge or under-hedge your stocks.

The other stock market risk management possibilities

You can also adopt a maximum portfolio drawdown rule. What does it mean? You have to set limits to the size of the drop in your portfolio value you can allow. In other words, determine how much of your portfolio you can bear to lose. This will decrease your personal ability to make emotional changes at the wrong time.

Keep your focus on stock price, and the value of an investment. Of course, plan ahead. The valuation is actually the heart of long term risk. Smart investors may have the advantage of volatility if they use tactical asset allocation. Follow their example. That will give you a chance to buy more assets when the prices are low but also, to hold fewer stocks when the prices are expensive.

Historical data shows stocks purchased while valuations are low, provide higher returns in the long run. Contrary, buying while valuation is expensive, generates the returns below average.

Bottom line

Risks of investing are part of being in the stock market. Sometimes, you will need to take bigger risks to reach your goals.
Learn the risks of investing in the stock market and do your homework. Make choices that will help you meet your investing plans.
Examine the risk of your investments from time to time. You have to know they still satisfy your risk tolerance.
Once some phrase appeared, we’ll paraphrase it: Be willing for the best, but act like the worst is coming soon.
You must be able to shift fast if suddenly something wrong appears. And, never give up!

13th January 2020
Value Investing Is Coming Back

Value stocks have underperformed since the beginning of 2007. But Goldman Sachs and Morgan Stanley claim that they have great potential.

Value investing is coming back according to data from the last autumn. This granddaddy of all investment types was set up in the first half of the 20th century and it is still actual.

For example last year, value investing has gotten fired by a typical value sector, energy. Last September made value investors satisfied, as returns of winners among cheap stocks outperformed big companies by a wide margin. The value-stock rally was exciting, unexpected, and fabulous. The past 10 years weren’t good for value investing. Actually, the value stocks were underperformed the growth stocks. They had weaker performances than it was the case with growth stocks. Moreover, some fund managers didn’t want to invest in utilities. What a great mistake! Utilities are the value stocks backbone. Their explanation was the value stocks are too expensive. Really? The fact is that utilities had a great performance last year and those managers suffered in a loss.

Why value investing is still a good opportunity?

Historically, they beat Grand Depression, played well during recessions, and inflation periods. Moreover, growth stocks have not become more profitable. So, the value stocks should finally be better. The reason is simple. They are unfairly cheaper. And that’s the point of value investing – finding under-appreciated stocks trading at low prices.

The stock market analysts found that stocks traded with low P/E and P/B ratios can easily beat the wider market. This opinion is supported by the facts.

A historical outlook

At the time of the financial crisis in August 2007, the S&P 500 index has returned 175%. The total return of value stocks in the US market was 120%. The return of growth stocks was fantastic 235%. Let’s go in the past more. Almost 20 years ago, value investors were devastated. For example, in 1999 and 2000 were so bad years for the value investing that some value investors had to step out of the market and retired.

But let’s stay for a while in 2007 and analyze growth investing deeper. What did happen?

That growth-strategy outperformance ended with the fall of the dot-com bubble. Value stocks came out of favor after the 2007 Global Financial crisis. On the other hand, growth stocks are performing remarkably well. Value stocks became unfairly cheap. You can notice that investors are expecting this global trend to continue since the global economic growth is slow. So, value stocks are trading at a discount compared to its more expensive growth peers.

But, is this discount a reason to invest in value stocks? It looks like that because value investing builds up. Slow economic growth caused value stocks to continue to produce stable free-cash flows. Yes, their businesses have slowed, but not damaged. At the same time, some of the growth stocks become extremely expensive. Moreover, the risk of failure in growth stock investing during slow economic conditions has grown.

Value Investing continues to make the headlines and not only in the US but also in Europe. We all can witness an increased number of headlines and publications, most recently, on the coming death of value investing. But now, something has changed.

Value investing is not dead

Timing the market seems to be difficult for investors. The intraday volatility grew over the last year, therefore, investors prefer not to bet as it will hurt long term goals. But this situation is beneficial for value. The value stocks start to outperform.

That will be a major market change. Value stocks’ years-long downtrend begins to turn. For some, it may seem a bit strange because investors in more cases neglect bargains. Everyone is trying to catch the major winners, famous companies, expensive stocks. They prefer to overpay some stock because of excitement. Oh, how wrong they are! But as we said, value stock investing is coming back.

Firstly, value stocks are cheap.

Value investing is the main principle for equity managers. There is long-term potency to buying cheap stocks over expensive growth stocks. Value investing was attractive over the entire history. Why shouldn’t it continue?
No one could say value investing is dead.

Goldman Sachs predicts a new life for value investing

Value investing has been decayed after years of underperformance. But Goldman Sachs says there’s still great growth possibilities in this classic factor strategy. And here are some reasons behind.

Value stocks will come back in favor very soon.

David Kostin, Goldman’s chief U.S. equity strategist explained that during the last 9 years the difference in valuation of expensive and cheap stocks was wider than ever.

Kostin said: “A wide distribution of price-to-earnings multiples has historically presaged strong value returns. However, a rotation into value stocks would require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing.”

The renaissance is coming

Value investing has gone out of favor particularly because the economic expansion gets stretched longer. Value brands continue to falter due to modest GDP.

But this course could start to change for value stocks. In the US an easier monetary policy from the Federal Reserve could increase growth expectations. Also, a rate cut could support the economy additionally. Bankers announced that possibility. Also, we already saw signs of resilience in US value stocks last September. Analysts predict that value stocks could finally enjoy a rebirth in 2020. Value investing means buying stocks that are trading below their value in the hopes of notable profit when the company comes into favor.

By default, value stocks have underperformed since the financial crisis. The investors have shifted into more energetic growth stocks, for example into technology. But last autumn, growth stocks were trading at high valuations and they became too expensive. In the same period, value stocks have shown important strength.

From October last year, the Russell 3000 Value index has dropped 2.4%, and the Russell 3000 Growth index has experienced a worrying 7.1% reversal.

Yes, growth stocks had a bounce, and outperformed value stocks. But there is some rule pointed by Morgan Stanley’s analysts. The markets are in the process of a regime change. That means the investors’ willingness to buy growth stocks will decrease as interest rates rise.

Goldman’s High Sharpe ratio

For investors assured on value stocks comeback, Goldman has selected value stocks with “a quality overlay.” Do you understand what does it mean?

These stocks could easily generate three times bigger returns than the average S&P 500 company with similar volatility. It is Goldman’s Sharpe ratio basket composed of 50 S&P 500 stocks with the highest ratios. This ratio measures a stock’s performance related to its volatility.

Goldman named the stocks with the highest earnings-related upside to consensus target prices. That are Qualcomm, Western Digital, Marathon Petroleum, Halliburton, Facebook, and Salesforce.

Bottom line

Many of the world’s most successful investors hold value stocks. They are buying cheap value stocks and benefit as the companies manage to work better.

For this to work, the stock has to stay cheap, so the company spends money on tremendous dividends and buybacks. The other option is the company be re-valued at a more relevant valuation, meaning more expensive. That is happening when the market recognizes the previous mistake in valuation.

For example, take a look at Altria (MO).

When the evidence about how toxic smoking is, appears to the public and more and more people stopped to smoke, investors had a feeling that cigarette producers will have a problem, the stock valuation was low. Well, something different happened to the company. The fundamentals remained strong. These stocks had good returns and still have.

How is this possible?

The stocks had higher dividend yields and investors reinvesting their dividends. Very good play. Tobacco companies also reinvested. They were buying back their cheap stocks and increased their earnings-per-share and dividend-per-share.

Smart investors know that value stocks can outperform most other factors. Some of the cheapest stocks in the market today are banks, oil companies, and so on. Keep it in mind.

So is value investing coming back? Do we really need to think better what the definition of value is?

12th January 2020
Leveraged ETFs – How to Trade, Guide, Tips and Strategies

(Updated October 2021)

Two times leveraged ETF is a vehicle calibrated to 200% or double the gain or loss of the price movement

Did you come across something called a leveraged ETFs? What is leveraged ETF and how it is different from other ETFs? We found a lot of questions like these thanks to visitors to our website. We’ll try to make this closer to you especially if you are a beginner in this field.

Let’s take time to jump in and explore these somewhat new securities.

Firstly, leveraged ETFs aren’t for long-term investors.

When you are buying a leveraged ETF, you must know that you have to make short-term trade. As we said, it isn’t a long-term investment. For newbies, a short-term trade lasts from one day to several weeks, not longer. Don’t try to buy a leveraged ETF for a long-term investment.

They became one of the most successful varieties of ETFs in recent times. So, we can easily say that leveraged ETFs are a novelty. However, they can be difficult innovation. Well, they are not either good or harmful, all you need is to know them better to be able to trade. Here are some basics about leveraged ETFs.

Let’s say the traditional ETF tracks one security in its underlying index, 1:1. As a difference, with leveraged ETF, you can strive for a 2:1 or even 3:1 ratio. A leveraged ETFs use financial derivatives to magnify the returns of an underlying index.

Leveraged ETFs are possible for the Nasdaq 100 and the Dow Jones Industrial Average, for example.

Where is the advantage?

Leveraged ETFs can help you to capitalize on the short-term momentum of a particular ETF. The main question is how to add leveraged ETFs into your portfolio?

For example, the trader is assured that a particular stock will drop. And trader is shorting that stock. Besides, shorting stocks are bought on margin and the trader has to borrow the money from the broker. That is leverage.

With leveraged ETF, you don’t need to buy the securities on margin, since it allows you to amplify your returns by multiples of over 1 up to 2 or 3 times. That depends on the ETF product you are trading. The amount of leverage will depend on your experience or temperament. Some less-experienced traders will choose lesser leverage, for example.

But be aware, they are designed to return three times the inverse of the S&P 500 index. So, if the S&P 500 drops by 1%, this fund should rise by approximately 3%. And contrary, if the index rises by 1%, this fund should drop by about 3%.

Leveraged ETFs have the aim to outperform the index or stock they track.

Also, there are inverse leveraged ETFs. They give multiple positive returns if some index decreases in value. They operate the same as normal inverse ETFs but designed for multiple returns.

Leveraged ETFs are not suitable for beginner’s portfolio

Please, don’t make a mistake. Yes, it is fascinating to have amplified returns but you should never add leveraged ETFs into your long-term portfolio. By buying them as a long-term investment you are making a foolish decision. To repeat, leveraged ETFs are not investments, they are speculation. Don’t mislead yourself.

Moreover, the payoff may not be as bright as you predict. So, they are risky. You will have to pay management fees, brokerage commissions, taxes on capital gains.

Leveraged ETF surely has its purpose for short-term investing. For example, you can use it as a hedge to protect a short position. Yet, long-term investors should be careful with leveraged ETFs.

Definitely, when things are going fabulous, leveraged ETFs are excellent investments. Over the first 6 months in 2017, the S&P 500 has returned a bit over 10% but the 3 times amplified leveraged ETF has returned approximately 30%.

But, think about what happens when the market turns down. For example, the S&P 500 falls by 10%. A leveraged ETF tracking the index could fall by approximately 30%. Just think about these figures.

How to make success in trading leveraged ETFs

As experts recommended, start with small if you aren’t experienced enough. When your portfolio becomes larger add more shares. There will be more risks, of course. But you will diversify your trades. Some elite traders recommend starting with an account of $25.000 minimum. Less isn’t recommended due to trading ability and margin rules for smaller accounts. Moreover, a smaller amount may cause conflicts in your decisions. You’ll need space to make them.

Further, trade when the sentiment is low. It is the best opportunity to profit. Set a stop-loss to, let’s say, minus 2% or 2.5%. Follow the trend and enter the winning position. If your profit goes up, sell some of your winning positions. Do it on spikes. If you reach 2% of profit very quickly, sell half of your shares to move stops up to breakeven. This can be a no-lose trade.

Read a lot about ETFs and leveraged ETFs and test some free trials to find the accurate one. Do your own homework, it is the best way.

Always monitor leveraged ETFs on a daily basis. If you have to use a limit order on a position it is reasonable to sell your position since you can’t follow market makers strictly. If you want to turn trade, it is better to trade traditional ETFs. that will give you less profit, but more freedom. For leveraged ETFs, you will need to sit and look at the screen or phone almost all day long. Trading isn’t for everyone, at all. That job can be addictive. Take a break from time to time but don’t give up. If you made some mistakes, keep in mind why, when, what caused them. And learn how to avoid them.

And buy when the ETFs are positive.

Disagreements

The leveraged ETFs are new and still developing, and the disagreements will change as time goes by.

Yes, they will provide you 2 times bigger returns but not always.

The typical fault is that leveraged returns are on a yearly basis. This is false. They provide multiplied returns on a daily basis. So, don’t look at the index’s yearly return of say 2% because the leveraged ETF will seemingly not have a return of 4% per year. Rather take a look at the daily returns during the year. However, something is more important. The multiple returns don’t mean you will have multiple profits. You may have multiple negative returns also.

Leveraged ETFs are high-risk due to their design. Also, some index-tracking malfunctions may occur as well as some other limitations.

Bottom line

These the most attractive ETFs in the market today have a great advantage of using. Traders can overcome some of the risks through diversification and leveraged ETFs are very suitable for that. Still, they are still adjusted for stocks only. Therefore if the stock market falls the ETFs will fall too. Anyway, you can enhance your trades if you spread the risk across other assets besides stocks. It’s easy to find ETFs assets like currencies, bonds, or commodities. That will help you to improve your portfolio diversification buying power (the last mentioned is for really aggressive traders).

Leveraged ETFs are new products but they are providing more choices to manage risks and take profit.

They are a good option but what if you don’t want to enhance your buying power if the bear market is in play? That would require short positions to take advantage of the downside potential in the market. A leveraged ETF could be a great answer in this situation, also.

9th January 2020
Trading Exit Strategy App – Where to Find It

Here’s a look at the best trading exit strategy app to avoid your losing trades

Do we really have the trading exit strategy app? Only when you can assure yourself that you are not holding a wrong position you can be confident that you hold a good trade. Every single trade must have its own exit strategy, that takes into account both price rises and price drops. In other words, risk management. So you MUST plan your exit and you must have the best trading exit strategy that is possible.
Well, how to create a good risk management system? How to choose a good exit strategy? How to determine it?
That’s science. It is difficult and mostly depends on your feelings which is the riskiest part of every trade.

Identify when to take profit from trading

Having an effective trading exit strategy app means to have the opportunity to identify when to make a profit from trading. Sometimes you will close your position too early and miss the bigger profits, other times you may lose if you stay too long on position.

When is the right time, how to know when to take a profit?

It is crucial, before entering the trading setups, every trader MUST have an exit strategy. It isn’t a matter of traders’ will, it is a matter of protecting from losing trades.

If you don’t have a trading exit, you’re trading without a strategy, you’re trading based on guesses or emotions. So, the chances of making a loss instead of profiting, are more likely.

What is the best trading strategy?

Basically, a trading strategy is a plan of buying and selling in the stock markets. It is based on rules that have to provide successful trading and make a profit.

When you are trading the stock market, you have to make a decision to buy or sell an asset, or to stay on the position. To be able to make a decision you’ll need information.

Trading strategies MUST assist you to simplify the process of analyzing all information and making decisions.

The stock market works simply. It is like an auction house. It provides to both buyers and sellers to set prices and make trades. The stock market operates thanks to a system of exchanges but it is a zero-sum game. Meaning, some traders have to lose, so you would have a chance to make a profit. There is no other way. Any trade has only two ends: loss or profit.

What is necessary to identify when to take profit from trading?

You should consider at least two exits: stop-loss and take-profit in your trading exit strategy.
Stop-loss is the point where you exit the position when the trade isn’t going in your favor. Take-profit is the point where you exit the trade in profit.

Getting out of losing trades

Losing trades is a reality. They are coming together with winning trades. Yet you are never sure is your trade losing or winning one. This can discourage many traders and they may give up.
But, wins and losses don’t need to come randomly. You don’t need to trade like that.
Yes, the stock prices may go up and down and nobody knows exactly why the stock price makes changes. The stocks are volatile and their price may extremely and rapidly change.

That’s the reason to have the best trading exit strategy app and keep the investment safe.

Traders choose different strategies depending on the time frame of the trade and how long they want to keep the trade opened.
Today, if you want to trade successfully, you will need to pay for hardware and software to use available strategies. But still, you have no guarantees and (this is more important) you don’t have any chance to check will your chosen strategy end with loss or in profit.

Reasons for seeking the trading exit strategy app

If traders have a good entry, it is more likely to reach the stop-loss or take-profit target faster. That will give you a chance to make another trade. And another, and so on.

But, if you don’t have a good entry you will need time to see the result. That may hurt your profit. Of course, some winning trades will take a bit of time to develop.

When you have a good entry you may increase the number of trades you want to take and you will have more advantages. To this point, everything sounds logical. But how to avoid premature trading exits and losses?

For all traders, this should be the last warning!

When it comes to the exit strategy the things are not so clear to many people. Having the best trading exit strategy (as much as it is possible) is important. Even more than planning for entry. Why? Your exit strategy shows how you have hedged your trade.

Do you really know when and how to exit the trade?

Most of the traders think that the entry point is the most important. Yes, it is important without doubts. But are you sure your trade will go in your direction? Do you have something to protect you from sudden price changes? That is the exit strategy. And if you don’t plan your trades you may end up with big losses.

If you didn’t think of an exit strategy, here is what you have to do.

Set Trailing stop-loss

A trailing stop-loss will help you to manage risk while optimizing possible peaks. By setting a trailing stop-loss you will secure your profits and accumulate more. Firstly, you must set levels for profit and loss. You will do that in a percentage, for example, 1.75% stop-loss and 3% take profit levels. What will the trailing stop loss do for your trade?

It will close your trade when it has created the set peak and the trend begins to reverse.

A trailing stop order means to set a limit on the maximum potential loss but without setting a limit on the maximum potential profit. We can identify “buy” and “sell” trailing stop orders.

Use time-based exit strategy

This exit strategy is when you appoint the maximum time you want to spend on a trade. This is a good strategy because if your trade isn’t successful after a given time, the smart choice is to exit the trade. Well, how much time you will give a trade is up to you.

Time-based exits are good when the trend is moving against you. It is a simple strategy that can help you control your losses.

Stop-loss/take-profit strategy

The truth is, there is no other way to get out of the trade than with loss or with profit. The last mentioned is better, right?
One of the best exit strategies is applying stop-loss/take-profit.

The goal of stop-loss is to keep you in a trade and limit losses while take-profit will secure profits by closing the trade when the profit target is reached. It isn’t easy to calculate adequate risk/reward ratios for stop-loss/take-profit orders. You’ll need time and effort to master it.

For example, how to identify the stop-loss position based on the money you are ready to risk at each trade? Stop-loss totally depends on the money invested.

Stop-loss and take-profit work almost in the same way but you have to define their levels differently. To make this more clear, the stop-loss will minimize the cost of the failed trade but the take-profit order will give you a chance to take the profit at the peak of the trade. You have to recognize the right moment to exit with profit.

The market swings all the time. One positive trend can easily turn into a downturn in a second. You may think it is better to exit the trade with profit right now. Why risk potential earnings? Well, it isn’t a good option. If you don’t let your profit to grow enough and you exit the trade prematurely, you will lose a great part of potential gain. But, also, waiting for too long can be equally harmful.

The drawback of stock trading apps

Trading apps that you can find currently on the market are good for some things. They will give you a real-time market data or will help you to find new stocks. Yes, there are some apps for charting but still, you will need to write it down to Excel. Additionally, those apps can be costly and out of reach.

The majority of stock trading apps you can find don’t give the variabilities in a meaningful way. Moreover, they don’t include one of the most important features for every single trade – examining and testing on where to set a stop-loss and take-profit level and when to exit the trade.

But, even if you decide to purchase them, will you have an opportunity to check the efficiency of your strategy? So, they are useless for the execution of your trades.

You need an effective and accurate exit strategy app

We were examining almost all apps, spent many years on research to find valuable tools or apps that would give traders a chance to check their exit strategies.
We couldn’t find any. There was no such app.

Until now.

Here is Traders Paradise’s best trading exit strategy app.
What our app is doing?

Traders Paradise developed a trading exit strategy app, a unique tool for optimizing the exit strategy.

This unique and easy-to-use trading exit strategy app will do all the hard work and complicated math operations for you and performs it all on its own.

All you have to do is to choose the stock you want to trade. We have a long list of the companies and you simply have to mark any by clicking on the name or to type the ticker name or the name of the company. But HERE you can find the full explanation.

8th January 2020
Indicator Trading And How To Use It

Indicators can help find some market tendencies but you must learn how to use them properly.

Indicator trading means to use technical indicators to examine the stock price and ensure trade signals. Trading indicators handles stock price data utilizing mathematical formulas. In essence, indicators will show you an illustration of the mathematical formula and stock price data. But you have to be an experienced chart reader or elite trader to notice that indicators will not show you more than the simple price chart without indicators.

But indicators may help to simplify it and that’s the reason why indicators are so attractive to fresh traders. Well, it is simpler to find an indicator that will define the trend or trend reversal than to learn how to examine and find a trend on the stock price chart.

So, behind indicator trading lies the simplicity of using.

Indicators will provide you a particular trade signal and alert you that is the time to enter a trade.

We can say that technical indicators are primarily formulas that help to examine chart data. They are accurate, they are simple, also, they request less time and give direction to price charts. But here is the tricky part. Indicator trading doesn’t mean that you will have 100% successful trades.

What are indicator trading strategies?

The main problem is that you can find numerous indicators and new indicators appear almost every day. But you can combine them and create an indicator trading strategy.

For example, a crossover strategy which means that price or an indicator crosses way with different indicator. Let’s say that price crossing a moving average is one of the simplest indicator trading strategies.

One of the variants of this strategy is when a shorter-term moving average crosses a longer-term moving average and it is so-called a moving average crossover.

Some crossover signals combine an RSI moving above 70, for example, and then go back under. When you see this signal you can be sure that there is the overbought condition and a pullback will occur. Thus, when you see a drop under let’s say 20 or 30, and it is accompanied by a rally back over 20 or 30, it is an indication that the rally will come.

Also, you can use indicators as a tool to confirm your opinion in trading since they will show you reversals and downtrends. There is one thing you have to keep in mind, a lot of indicator trading strategies will not result in profit.

What are the disadvantages of indicator trading?

So, it is obvious that indicators have their flaws. The problem is that they make calculations based on historical prices, so they don’t provide any outside insights. If you practice indicator trading in the stock trading, technical indicators will never give you actual data about the company.

Moreover, indicators usually come after the price chart. So, the following situation may occur. Let’s say the current price is changed for a short time and got back, but your indicators will be changed according to the previous price but you entered the trade based on them. What is likely to happen? Your entry point is wrong and you could end up with a loss.

Lastly, indicators may oppose each other. Also, the same indicator may display different things at different times. And you have to recognize when they are accurate.

This is the reason why many traders have doubts about indicators. Yes, you can find various indicators or develop your own by using software but you have to use them properly.

How to use indicators properly?

Firstly, don’t expect a miracle from indicators. All you can expect is that your estimation will be a bit more accurate. But your decision shouldn’t be based on one particular indicator. The reason behind is that all indicators are not the same. Each of them has its own philosophy and mission, to be said.

You can find many types of indicators, for example, trend indicators, volatility indicators, oscillators, etc. But indicators are useful only if you use them in line with their design. For example, the trend indicator is adjusted to recognize and follow a trend. You cannot use it for the price in a range because you will miss its full potential. Another thing is very very important. Indicators may provide you faulty information if you don’t use them in a proper way.

The benefit of indicator trading

As we said above, they can simplify price moves. For newbies in the stock market indicators are easier to understand than the complicated price chart. But easy isn’t always profitable, you should know that and keep that in mind.

Indicators are outstanding tools for mastering how to find gaps or strengths in the stock price when trends are weakening. They can be very helpful for new traders that still have a problem to guess on a price chart. With the help of indicators, they could recognize the fine tunes they have not yet qualified themselves to notice on the price chart.

How many trading indicators to use?

In indicator trading, you will need several indicators to know when and how to enter the trade. If you use only one indicator it is possible to get false signals. A lot of them.

For example, the MACD provides crossover signals and it is smart to sell when the MACD graph goes under the signal line. But if you are a really smart trader, you will not sell every single time when MACD shows that or you’ll have a lot of losing trades. So, you will need to use some other indicators as control or filter in order to recognize the trend. For example, the moving average can be useful. In this way, you’ll increase the number of valuable signals. Simple as that.

But be cautious, if you use too many indicators you may overanalysis your chart. That can have a bad influence on your trade.

The experts’ recommendation is to use up to 5 indicators per trade. Actually, 3 indicators are quite good enough for a solid trading strategy.

Bottom line

The indicators are a key part of technical analysis, after all. But do you really need indicators for profitable trading? Actually, no. Surely, they can give you strongly aid and improve the results of your trading and they are worth using. On the other hand, never observe indicators as only and the most important part of trading. The truth is they can simplify your trading more than price action trading. But keep in mind, as we said, the simple isn’t always more profitable.

Use indicator trading to recognize occasions when to get in or out of the trade since it isn’t always visible in the price charts.
In most cases, indicators will not tell you what the price chart is not telling you. Hence, use indicators if required. If you see they are not raising your profit, give up.

Is there any other reason you may have to use them? No.

6th January 2020
The Average Stock Market Return

The stock market average return of 10% is exactly that – an average, while the returns for any particular year may be lower or higher.

The average stock market return was about 10% annual for the past almost 100 years. But when we take a look at any year particularly we could notice that the returns weren’t always average. And that is the truth about the average stock market return, it is average rarely.

Historical data shows the average stock market return is 10% but when you look at year-to-year it can vary. For example, this rate should be reduced by inflation. Inflation can vary too let’s say from 2% to 3% which is a regular rate.

But when we talk about investing and investors we usually think about long-term investments. To be honest, the stock market likes long-term investors. They are keeping their investments five or more years.

Keep in mind: the stock market’s returns aren’t average and could be far from average. For example, over the past 80 years, you could find that the average stock market return was from 8% to 12% only several times. Due to the volatility of the stock markets, most of the time the average stock market return was higher or lower. So, returns can be positive even when the market is volatile but the average stock market return will not rise every year. Sometimes it will be lower sometimes higher.

What is the average stock market return?

The average stock market return actually is about 7%. If we take into account the periods of highs, for example, the 1950s the returns were up to 16%. But we had the negative returns of 3% in the 2000s.

For example, from 1998 to 2018, we had an average stock market return of 6.88%. The lower return came from the enormous loss in the market in 2008.

But, over the last 50 years, the average stock market return was 10.09%.

The stats may help here, the Dow Jones – by May 25, 2018, the average annual return was 5.42%. On January 6, 2012, a 25-year period ended with an average return of 7.55% per year. But if we look at data from the beginning of 20 century, the average stock market return was around 4.3% respectively.

On the other hand, the S&P 500 index had average returns from 1957 through the end of 2018 about 7.96%. But, the average annual return from its inception in 1926 through the end of 2018 was about 10%. Last year, 2019 was great with a return of 30.43%. If we include dividend reinvestment, the S&P 500 return was 33.07%.

How to calculate the average return on stocks?

The average return on your stocks’ portfolio should reveal to you how well your investments have run in a particular period. This can also help you to predict future returns. Remember, this measure isn’t the annual compound growth rate.

So, to calculate the average return on stocks you will need to calculate the return for each period. The next step is to add returns together and divide the result by the number of periods. That’s how you will get the average stock return.

Calculate the average rate of return

Firstly, what is the average rate of return?
It is the percentage rate of return that is expected on an investment but compared to the initial cost.

The formula is quite simple. Divide the average annual net earnings after taxes or return on the investment to get the average annual net earnings and then display in percentage.

The average rate of return formula = (Average Annual Net Earnings – Taxes) / Initial investment x 100%

Here is the explanation of what we did:

Firstly, determine the earnings from stock for a particular period, let’s say 10 years. Now, you have to calculate the average annual return. Do that by dividing the total earnings after 10 years by the number of years.

Further, if you have a one-time investment, find the initial investment in the stock. If you want to calculate for regular stock investments, take the average investment over life.

And finally, divide the average annual return by initial investment in the stock.

Also, you can do all of this and get the same result if you divide the average annual return by average investment in the stock but expressed in percentage.

Let’s take the example of a stock that is likely to generate returns of 10% per year after taxes and for a period of 3 years.

The initial investment $10.000
First-year’s net earnings $1.000
Second-year net earning $2.100
Third-year net earnings $3.310

Use formula

The average rate of return formula = (Average Annual Net Earnings – Taxes) / Initial investment x 100%

After 3 years your initial investment will be increased by 64% or you will have $6.420 more in your account.

What does this mean for investors?

As always, computing dividends is important and you have to account for them. If you reinvested received dividends, even better. That’s compounding on compounding!

The truth be told, those who have stayed invested in stocks have largely been rewarded.

The understanding of the concept of the average rate of return is important because investors make decisions based on the possible amount of return expected from an investment. Based on the average rate of return, you can decide will you enter into an investment or not. Moreover, the return is used for ranking the stocks and ultimately you will choose per the ranking and include them in the portfolio.

In a few words, the higher the return, the better is the stock.

But let’s examine one different case of the average stock market return.

Let’s say your initial investment is also $10.000 but (this isn’t easy to say) in the first year you lost 20% of the initial investment. That’s bad news. But in the second year, you gained 20% of the initial investment. Oh, how nice it is!

Yes, nice but your gain is zero.

(-20+20) = 0

What do you think? Do you still have your $10.000? Things never move in that way.

Here is why.

When you lose 20% of your initial investment you ended up with $8.000. Right? That amount became the amount of your investment. On that amount, you gained 20% or $1.600. So, after two years you have $9.600 in your hands and you are short for $400 compared to your initial investment of $10.000. You lose money and your return isn’t zero. Your return is minus and you will need more gains in bigger percentages to cover that loss.

The stock market average return isn’t misleading. That is how you have to calculate it.

Or to calculate CAGR.

Bottom line

This means that investors MUST have a financial plan and investing strategy.
There are no guarantees for big gains in the stock market and never were. The average return of 7% or 10% is great if you are a long-term investor. It is reasonable to expect a good return on the current stock markets if you reduce your enthusiasm when the good times come.
That’s nice, you’re making money. But, when stocks are jumping, remember that not so good time may come. Especially keep this in your mind over the bull market cycle.
You can get the average return only if you buy and hold but not if you trade frequently. Even a few percent per year can produce nice gain over the years.

3rd January 2020
Investing In Gold Will Always Be the Smart Move

Get exposure to gold, it isn’t as risky as some may think and deserves a place in your portfolio.
Gold can be a hedge against inflation and deflation

By Guy Avtalyon

Investing in gold whether own it as a metal, jewelry, mining stock or mutual fund is always a smart decision. This is especially true when the main currencies are dropping. There is one interesting situation that confirms the gold to be the most valuable asset. Gold is a benchmark for national currencies, for example. As the currency falls, gold will rise.

So, let’s highlight the chance of gold’s future.

Some may say that investing in blue-chips is better. Okay, it is still a good investment, yes. But is there a true potential for profit? Can blue-chips persist in the global market? They are mastodons. We are talking about them with respect but for most investors they are unachievable.

What is investing in gold?

Gold has a possibility for future growth. The “golden standard” is still live no matter what the banks will insist on. It was in the past, it is now, and it will be.

Traders-Paradise wants to highlight some opportunities for investing in gold and how to do so. Hopefully, you will find your way.

Why investing in gold?

Gold is respected everywhere in the world because of its value and bright history.

Gold’s history started in 3000 B.C but from 560 B.C. gold is used as a currency. The need of the ancient merchants was to use something broadly accepted in order to make trade simpler. Since the gold was universally accepted for expensive jewelry they recognized the potential in gold for valuing their products. And in trading, also.

A coin with a seal was accepted all over the world as value for products. Since then, this rare metal that comes back, when other currencies don’t work.

So, we can conclude that gold prices are negatively proportional to equity. Speaking about returns in long-term investments, gold isn’t so good because stocks or funds will always give better returns.

Gold returns in comparison to assets returns

Yes, the asset will always do better. But it can be volatile during the time.

Oh, wait! Gold is a volatile investment too.

Let’s look at some stats, like standard deviation. What is the standard deviation? It is a degree of how spread out numbers is. In the example of a stock price, it measures the volume of variability and dispersion around an average. It is a measure of volatility, also. Generally, dispersion is the difference between the current value and the average value. The larger the dispersion or variability means the higher the standard deviation. And vice versa, the lower figures are implying less price variability. Investors use the standard deviation to estimate the supposed risk and define the importance of specific price movements.

During the last five years, the annual standard deviation of gold was 16. The annual loss was about 4%. This means that the chance that gold will give a profit is about 12% and a loss of 20%. That represents a big range and falls into a negative area.

If we compare data for, let’s say the S&P 500, we will see that the standard deviation was a bit under 10, for the same period of five years and an annual average return was around 13%.

Let’s calculate again and we will see the range was between a gain of 23% and a gain of 3%.

Is gold volatile?

But, keep in mind, the higher volatility of gold is the standard, not the anomaly. As an investment, gold is risky. But, something very similar to the relationship with currencies arises.
Gold and stocks very rarely perform the same thing at the same time. Meaning, when the stock market lags, gold will be doing well. This doesn’t mean you shouldn’t invest in gold. Investing in gold ONLY is a risky position.
This synergy between stocks and gold is where gold is a good investment. Honestly, gold can be a very safe investment.

For example, the relationship between the entire stock market and the midcap over the past 10 years is about 0.98. Gold has a relationship with the stock market of 0.04 during the same period. Basically, gold creates its own game.

Is gold a good hedge against inflation

Historically speaking, gold has been a good hedge against inflation.

The price of gold will always increase along with the increased cost of living. If we consider how gold prices performed over the past 50 years, we could see that its price has been rising while the stock market has been falling during the inflation periods. Do you remember the relationship between gold and currencies?

When fiat reduces its buying power during inflation, meaning, you will need more units of money to buy anything. Also, gold is much more valued in money, and, therefore, gold price tends to rise. Furthermore, gold is a good store of value. People are more willing to buy gold when they think that their national coin is dropping in value.

But, should gold can be used as a hedge against inflation? In short, according to the mentioned above, yes.

Investing in gold as deflation protection

When the business operations decrease, the economy has excessive debt, and prices decrease too, we are speaking about deflation. The full deflation we saw last time was the Great Depression (1930). Part of deflation happened after the 2008 financial crisis. But it has happened in some parts of the world.

During the deflation (Great Depression), the buying power of gold rose while other assets’ prices fell. The most secure place to put cash in that time was gold. Today, we have a similar situation in some parts of the world.

A portfolio plan

Let’s explain this in the example from the recent past. During the recession from 2007 to 2009, the S$P 500 Index dropped 36%. But the gold price increased by 25%. Yes, it was extremely. But, can you see how good is to diversify your portfolio by adding gold? Even with the knowledge that gold is a volatile investment.

When you add the gold in your portfolio you will have that one that performs differently from the others. Gold will always act differently from bonds and stocks. That’s why many investors add gold to their portfolios. The recommended part is 10% of the overall portfolio in gold. That will create a good balance and good diversification of your investments. Moreover, you will provide the safety of the complete portfolio. By adding gold you will reduce volatility and risk. Moreover, investors are investing in gold as a safe haven during political and economic difficulties.

Investing to have the dividend

Gold stocks are suitable for growth investors, but a lot less for income investors. That is because the gold stock will change the prices along with the gold prices. But you can find well-managed mining companies, profitable even when the gold prices are falling.
Rises in the price of gold are often increased in gold-stock prices. A small rise in gold prices can lead to important gains in the gold stocks. Moreover, holders of gold stocks could get a much higher ROI than holders of natural gold.
Gold stocks that pay dividends tend to produce bigger gains. In periods when the whole industry is rising, they could be twice better than non-paying dividends when the market is in a downturn.

Investing in gold is possible in many different ways.
Today we have more investment options, such as futures, companies, bullion, coins, mutual funds, miners, jewelry, etc.
For example, gold can outperform stocks and bonds which has happened during a period of 45 years. But if we look at 30 years-period, stocks and bonds were better. If we evaluate 15 years-period gold has outperformed both stocks and bonds.

This is one angle of view. The other comes from gold’s ability to protect your portfolio and act as a hedge against inflation.

Anyway, it is smart to consider holding not more than 10% of the portfolio in gold. Choosing how to invest in gold includes analyzing the various gold-related investment products These investment products have various risks and return forms, liquidity components, etc. Consider how gold performs in a correlation with other assets.

30th December 2019