Tag: Profit

All profit trading related articles are found here. Educative, informative and written clearly.

  • Defensive Stocks Are Excellent Investment But…

    Defensive Stocks Are Excellent Investment But…

    Defensive Stocks Are Excellent Investment But...
    Defensive stocks provide dividends and stable earnings but the low volatility may cause fewer gains during bull markets.

    By Guy Avtalyon

    Several days ago, the website U.S.News posted an article about defensive stocks. As always, great and concrete suggestions.  You can find their suggestions with an explanation of why the proposed defensive stocks are best picks for this June.
    Here is one quotation about these stocks.

    “More conservative investors who value both capital appreciation and preservation of capital might look to these stocks.” was written The U.S. News. 

    This might mean this kind of stock is less risky than most of the stocks in the market.

    Further, in the same article, you’ll find a short description of what criteria investors should use when picking defensive stocks. For example, market capitalizations should be above $50 billion, such companies should have at least a 10-year track of continuous paying dividends, etc. All is followed by the list of these stocks that look like the best choice for June this year.

    That simply imposed the topic, what are these stocks. Why buy them? How to choose? Where to look for them? 

    What are defensive stocks?

    A long time ago it would be very easy to answer. You could be easily trapped listening to some financial experts saying how defensive stocks are boring investments. Moreover, you could hear they are too conservative. It might be true, even today. These stocks come into utilities, healthcare, and staples sectors. Well, one could think: Yeah, these sectors are not excited, not at all, so why should I invest there. We would like to ask you something. Would you like to invest in some company that generates steady cash flow, pays dividends regularly? Yes? We didn’t expect any other answer.  Would you be surprised if we tell you that, for example, tobacco companies were viewed as defensive stocks?

    But recently, investors changed their views of what these stocks are. Today, you can see that some technology companies are considered defensive stocks. Even if the definition is changed, the purpose isn’t, these stocks still have to play well during the recession. Nevertheless, these stocks have, as it always was, to provide stable earnings and regular dividends no matter what condition is the overall market. Period! 

    Are the defensive stocks less risky?

    Since there is a constant demand for such companies’ products, these stocks seem much more steady and strong during many different aspects of the business cycle.

    And here is the confusing part for some investors, especially if they are beginners. They aren’t the same as defense stocks. Do you know what we mean? Defense stocks are stocks of the companies that are producing munition, guns, war jets, etc.

    Nowadays, companies with stable earnings growth, but also with innovative goods, pricing strength, are recognized as defensive stocks. Don’t be surprised if they can stir the waters. If we consider cash flow and the company’s power, nowadays Alphabet could be such a company, for example. 

    How to recognize defensive stocks

    When uncertain time in the market comes everyone would like to protect the investment portfolio, the capital invested. Especially if it is connected to high volatility. Investors are looking for stable investments during such rough times. They would like, for sure, to increase their exposure to these stocks. For example, giants like Coca-Cola are recognized as defensive stocks. Non-cyclical stocks are recognized as defensive stocks also.

    These companies have stable performances and the ability to overcome weak economic circumstances. They are also paying dividends. That might be a good reason to choose them primarily because dividends can mitigate the influence of the stock’s price dropping. These companies will rarely go bankrupt during the market downturn.

    When things in the stock market get insecure, why would you like to own any stock? Honestly, you could find more safe places out there to invest in. The answer is profit. Defensive stocks provide a higher dividend yield than you can get with safe-havens. For example, Treasury bills will never provide you such an amount in interest rate. Moreover, defensive stocks mitigate investors’ fears because they aren’t as risky as other stocks. Take a look at what investment managers do when uncertain economic times come. They are moving to defensive stocks.

    Better isn’t always the best

    Defensive stocks are better performers than the overall market during recessions, for example. But nothing is so perfect even these stocks. Due to their low beta, when everything is blooming in the market, they could perform below the market. Less risk, less profit, that’s it.

    For example, suppose a stock has a beta of 0,5 and the market falls for 2% in one week. Not a big deal, you’ll lose 1% of your investment. But what if we have the opposite situation and the price increases 2% in one week? Well, the defensive stock with a beta of 0,5 will increase by only 1%.

    Beta shows the stock’s vulnerability or risk. Defensive stocks have beta under 1 which means they are less volatile. A conservative investor, who is, by default, with less risk-tolerance type, will choose defensive stocks that will deliver stable returns.

    Advantages and disadvantages of Defensive stocks

    They are often suitable for long-term investors because they are less risky than other stocks. These stocks together have a higher Sharpe ratio than the entire stock market. With less risk involved, you could beat the market. What else we need to understand is that defensive stocks are better investment choices than other stocks. 

    But there are some disadvantages also.

    The low volatility of these stocks is one of them. This means smaller gains when the market is bullish. That could be the reason why some investors if not many, don’t like defensive stocks. These stocks usually cannot outperform the market in such a period. So, when investors need them most to profit more, they could betray them. There is one interesting thing about defensive stocks. When the market downturn is finished, some investors move to these stocks, but the truth is they had to do that earlier. After the market downturn is too late. The only thing that investors could catch is a lower rate of return. Think ahead of these stocks.

    Why should you choose to invest in them?

    For example, you don’t have a decent knowledge of the market condition. Also, if you are the risk-averse type of investor. Seeking for dividend-paying stocks is one of the reasons because these stocks provide regular dividends. Additionally, defensive stocks are a great choice when the markets are volatile. 

    These stocks managed to perform well even during the recessions. There are some goods that people will always need no matter what the economic situation is. For example, electricity, soap, or gas, everyone would need gas or soap even if the apocalypse is coming.

    To summarize, defensive stocks have beta lower than 1, they are less volatile, they provide regular dividends. The main drawback is that they usually couldn’t generate high returns. But during the recession, they are excellent as protection for your other investments. Beta indicates the stock’s vulnerability or risk factor. This kind of stock has beta lesser than 1 which implies that they are less volatile. A conservative investor who is afraid of taking risks can invest in defensive stocks that will give stable returns.
    These stocks are also recognized as non-cyclical stocks because they are not deeply associated with the business cycle. Here are a few types of defensive stocks. Such stocks are utilities, consumer staples, healthcare, gas, electricity, pharmaceuticals.

  • The Danger of Diversification In Investing

    The Danger of Diversification In Investing

    The Danger of Diversification In Investing
    Diversification has to be a well thought out step for investors. It can boost growth and lead you to wealth. But if doing improperly, it can cause costly failures.

    Investors infrequently pay attention to the danger of diversification. All taught that the idea of diversification is to reduce the portfolio’s risk. And nothing is wrong with that. Some amount of diversification is important or investors will take too much risk that will never be neutralized for.
    But sometimes too much can be very bad. It is the same with the diversification of the portfolio if it is too diversified. And we will explain to you the danger of diversification. 

    So, in the first place, the danger of diversification may come when the diversification is done improperly but also if the investment portfolio is over-diversified. But let’s go step by step through all examples of the danger of diversification because they can be very costly. They can ruin the whole investment and leave you with your empty hands.

    The danger of diversification in investing

    Portfolio without focus

    No one will tell you that the danger of diversification is the reduced quality of your investments. In investing, one of the very important parts is to have a well-focused portfolio. That provides investors to have the best opportunities. To say this way, publicly listed companies are not all worthy to invest in. Also, what is maybe more important, you can find even fewer companies that are so-called safe investments. In order to have well-diversified portfolios, investors don’t pay enough attention when picking the stocks they could add many of them that don’t give a margin of safety to the portfolio. That will cause a reduction in the quality of investment. That would be the danger of diversification.

    A complicated mixture of assets

    The other danger may appear if investors add too many assets without truly understanding what they have. In other words, their portfolios are too complicated. The point with investing is to have control over your investments and know what they are. If you have too many assets from different classes you would be lost in attempting to follow them and to stay on top of them. 

    Portfolio volatility

    It’s very important to understand that the more stocks you add to your portfolio, it will be more correlated to the market returns. There is some logic behind and you have to understand it because portfolio volatility can lower your portfolio performance. So, it can be too risky. Always keep in mind that the number of investors that ever reach average returns is under the average. The reason is the volatility caused by risk.

    Having an index fund instead of a portfolio

    Instead of buying too many stocks and adding too many assets, it’s better to buy some index funds. If you have too many assets, your portfolio will look like an index fund anyway. So indexing can be the danger of diversification. Indexing is good when the bull market, but if it is bear you could be faced with a lot of problems and danger.

    Indexing, as well as over-diversification, represents the hidden danger of diversification. For example, if your portfolio may not have quality if you hold second-rate investments along with great investments. Sometimes, holding so-called inferior investments is the result of ef emotional buying, so avoid that. Pick stocks after you research them, never based on some emotions.

    What can put us in danger of diversification?

    The largest single danger is a surprise risk. Surprises are often part of our everyday life but when it comes to our investment it is a sign that we as investors are not cautious enough. Investors should be aware of risks and to predict them as much as possible. It is crucial in investing, due to safety, to quickly transfer our assets that show more risks than we expected or we can accept.

    Also, forget you’re able to have an excellent and perfect plan for your future. Very often some unexpected events can arise. For example, this coronavirus pandemic that we have now. These events have a great impact on our investments so if we have over-diversified portfolios how could we manage all the investment? It’s almost impossible.

    The perfect investment plan doesn’t exist. Every single investor made some mistakes. Just listen to what Warren Buffet has to say about his mistakes and wrong decisions. Yes, even him.

    The belief that you are always right isn’t only a stupidity, it is a more dangerous practice. However, it demands to keep on learning in order to modify your behavior. 

    If you never change your behavior you’ll take too many risks and you’ll put yourself in one of the dangerous situations. Moreover, you’ll never grow as an investor and, also, your capital will not grow. Sometimes it is better to give up and admit we are wrong than stay with the wrong plan and make more mistakes. 

    Comfort from following others

    We are all vulnerable and insecure at some level, whether we admit it or not. A great number of people seek help in instant solutions. The easiest way is to follow what other investors do. That’s a kind of psychological effect. If the majority is doing something, how can that be wrong? Remember, only a few investors know how to make money on the stock market. The others, the majority fail. The stats are cruel. 

    The winners represent a small part of all investors. 

    Investing is difficult but it can be very successful and profitable. All you have to do is to guess where the new gain capacity will come from. The tricky part is that you cannot do that without the knowledge and without comprehensive research. The best suggestion is: follow the standards, not the people.

    The fake feeling of security can bring us to the danger of diversification

    The truth is that many apparently diversified portfolios aren’t really diverse. For example, if your portfolio consists of stocks of 5 different companies and 5 different industries it might seem as a well-diversified one. But if all your portfolio consists of 100% stock in one market index and they are all based in the same country and have exposure to the same currency, you have a very dangerous diversification. In other words, your investment is at great risk. 

    You might think you made a great choice, but in reality, you are at risk to lose everything if some unfortunate event hit that country or currency.

    Bottom line

    Proper diversification is a matter of great importance. Smart investors allocate their money based on their own valuations, never on some prophecy or doubted predictions. Avoid over-diversification if you are invested in ETFs or mutual funds since it is a common mistake. When picking the stocks, seek the highest quality companies, to direct the chances of success in your favor.

    The bright side of portfolio management is that you can avoid the danger of diversification if you manage your portfolio on your own. Diversification is an extremely crucial concept in portfolio management, but it has to be done properly. When building your portfolio keep in mind the danger of diversification in investing. That will help you to reach optimal diversification.

  • Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment - How To Know Where To Invest?
    The long-term returns seem attractive, and it is easy to start investing. But you must have realistic expectations.

    By Guy Avtalyon

    Good returns on investment is what every single investor wants. But some have unreasonable expectations. Especially beginners. They are hunting stupid high returns on investments and lose money. No matter what asset class is, they are looking for high rates of return. Nothing is wrong with that, but a dose of reality is necessary for investing. Dreaming is okay, of course since it can motivate us to reach our goals but if our dreams are unrealistic it can deliver us the stress when we unveil that reality isn’t like our dreams. 

    So, everyone including beginners in the stock market must understand what are good returns on investment. We would all like to become rich overnight, that is a legit dream but the real-life is something different. One of the main problems is that beginners don’t understand the effect of compounding nor how it works. Most of them don’t know what good returns on investment means, how much it is.

    First of all, temper your expectations. 

    Over almost the last 100 years, the stock market’s average return is about 10% per year. But returns are infrequently average. So, if you are one of the new investors you have to know several things about what good returns on investment is. 

    What are good returns on investment?

    You have to know that historical data shows that the average stock market return is 10%. Are you surprised? What did you expect? Oh, we know! You heard the stocks are among the riskiest investments and the high risk may provide you a high potential reward, right? That’s true but it will not happen overnight. Let’s go back to average stock returns. 

    The S&P 500 Index is the benchmark measure for annual returns. When we said the average annual return is 10% it wasn’t quite true. The truth is that you have to reduce this 10% by inflation. For example, if you start to invest now you can expect to lose buying power of 2-3% per year which is caused by inflation.

    The stock market is directed on long-term investments. That means you can invest your extra or saved money you will not need for the next five years or longer. If you don’t like this you may prefer a shorter investing period, for example, a year or two. Well, then the stock market isn’t for you. Choose one of the lower-risk alternatives. For instance, a savings account. Yes, you will have the lower returns, but you’ll be protected from stock’s volatility.

    As we mentioned above, the average return per year is 10%, but it is actually far away from average. There were periods when it was dramatically lower but also the periods when the returns were much, much higher. That’s due to the stock’s volatility. We have to say and this may sound illogical for beginners, but even during the volatile market’s years, returns can be good.

    Your expectations must be fair

    Honestly, you have to learn this. Especially if you’re a new investor. You may think you can earn 25% on your stock investments over several decades. We have to tell you, your expectations are extremely big. It’s not going to happen. Maybe this is rude to say, but that’s insane. Yes, we know you found someone out there who promised you that high returns, but you have to understand cush lied to you. Such is counting on your lack of experience, and on your greed. Are you greedy? Go to the casino! Start gambling! Stock investing is a serious job, hard work, also connected with a lot of pleasure and passion with one single most important goal – to have good returns on investment and over time, to provide financial security for yourself. Well, and maybe, just maybe you’ll become rich. 

    So, your financial foundation should never be based on dangerous opinions and actions. Don’t be irresponsible. What you really need is your investment to provide you a nice retirement, you wouldn’t like to end up with less money than you expected.

    The meaning of good returns on investment can be confusing for someone, particularly young investors because when you enter the stock market you might know only about a 10% annual return rate. But keep in mind, you don’t have guarantees that they are going to repeat themselves. The returns on investments never were a smooth or upward path. remember, markets are volatile and you may suffer great losses over time. But what is important and everyone should know that that’s the nature of the free-market. Over a long-time period, you’ll beat the market if you follow some rules.

    How to calculate the rate of return

    Let’s say you already have determined your investing goals. You clearly know what your target is. Also, you have to identify the amount of capital and time you have to invest. All information you need is in front of you. So, let’s see the magic of compounding.

    For example, you have $2.000 to invest. Assume that the annual rate of return is 10%. After one year you’ll have $2.200, right? But what if you want to sell your whole investment after 2 years, for example, for $3.000. Super done! Your profit is $1.000 which is a 50% return. Amazing! Oh, wait! You have to pay capital gains taxes. Take away 15% from your gain. Well, your profit isn’t $1.000, it is $850. You’re left with $2.850. Well, you still have good returns on your investment after two years. It is 42,50% now. Did we have inflation? Of course, we did. So, you have to count inflation of 4% for 2 years. 

    Let’s do it.

    $2,850×0.96×0.96=$2,626.56 

    That is 31.32% real return of your investment. This $2.626 amount still isn’t bad but it’s far away from your $3.000 and 50% where we started this calculation.

    Look, the annual rate represents the profit you earn on your investment per year, or how much will you get in return for each dollar invested every year.

    There is a simpler calculation. Just find a simple percentage. For example, you invested $1.000 and your gain is $300. What will your return be? 

    (300/1000)x100 = 0,3×100 = 30%

    This approximative value. But if you want to know the exact you’ll need the first calculation we showed you. That is a well-known ROI, return on investment.

    Can the stock market give you good returns on investment?

    The stock market is unstable and unpredictable, so you’ll never have any guarantees there. But if you consider this 10% average return you’ll understand that investing in stocks may provide you financial security in the long run.

    What are the good returns on investment today?

    Well, the answer is pretty complex but to make it simpler, use this rule of thumb: If the recent returns were higher than average, the future returns will be lower. 

    That’s why it is much better to calculate, for example, 6% or 7% of the average annual of return when estimating your returns over time. Because, as you can see, this average return is rare. It is higher or lower. Also, there is some psychological effect, if you expect too high returns you’ll be disappointed if your investment never gives you that. Also, you’ll be glad if your investments beat your expectations.

    The best approach in the stock market, if you want to make real money, is to buy stocks at good prices and sell them at a profit.  What is a good price? To figure it out you’ll have to know how much money you want to get when you sell it.

    Good returns on investment for an active investor is 15% per year. For this to reach you’ll need to be aggressive in looking for bargains. It isn’t hard to achieve. For example, your buying power can be doubled every 6 years if you have average annual returns of 12% after you pay all taxes, also, count the inflation for each year. This is one way to beat the stock market. The other is to become a trader but a smart one. The coronavirus is causing people from almost all parts of the globe to halt their activities. People are urged to stay home, schools are moving to online learning. Take this as an advantage and learn something useful, why not?

  • Safe Haven Assets Where Investors Have Begun Piling Into

    Safe Haven Assets Where Investors Have Begun Piling Into

    safe-haven assets
    Safe-haven assets are a fundamental place to avoid economic downturns. They express the markets that can protect the investment from losses when the market falls.

    The safe-haven assets are investments that investors start piling into during intense market volatility and uncertainty. The main goal is to take a position into investments that are recognized as safe from losses. Even more, they have the capacity to rise in price while the bulk of other assets are declining value. 

    Safe-haven assets provide investors to limit their exposure to losses when market downturns and protect their capital invested. Like we have now when almost all markets plunged. When the markets enter tumultuous times like this one, the value of investments falls sharply. Investors are seeking assets that are not correlated to the markets. These kinds of assets are safe-haven assets.

    So, we can say that safe-haven assets are able to hold or grow in value during the market turbulence.

    Do anything to minimize the risk

    Risk is real if you want to invest in stock markets. But it isn’t necessary to be exposed to great risks if you can avoid it. The point is to minimize the risks all the time, during the life of your investment. But when the market is declining almost all assets become too risky. In order to protect their capital, investors leave their position in unsafe assets and start buying something safer.
    Safe-haven assets are those that don’t carry a high risk of loss. Historically that was cash, real estate, mutual funds, CDs, etc. You may ask, is gold a safe-haven asset? Gold as much as silver are historically used as a hedge against market or political uncertainty or the devaluation of a currency. But having in mind that gold coins have varied during the unstable political situations, it might be a wrong choice. Anyway, commodities are risky.

    Better pick s risk-free assets, such as sovereign debt instruments or hold gold and silver trough futures.

    What are safe-haven assets?

    Safe-haven assets are the necessary answer to economic downturns. They are the markets that can protect investors from losses when other assets and markets fall. How can they protect your investment portfolio?
    Safe-haven assets are holdings where investors and traders set their money to protect against major droppings. Safe-haven assets must allow protection from losses.

    But what are the characteristics of safe-haven assets?

    If you want trade safe-haven assets you must pay attention to liquidity. Such assets must have high liquidity. Why is this characteristic so important? Because that will provide you to enter and exit positions at a price you determine but without slippage. Further, safe-haven markets must have limited supply.  You don’t want the assets with a supply that passes their demand. It is more likely for such an asset to decrease in value. For example, gold has a deficit of supply, but higher value when demand increases. 

    True safe-haven assets have to hold a certain level of demand in the future. So you, as an investor, must believe in the assets’ future, you must be confident about it. For example, that is the reason why silver isn’t so good investment choice. Yes, it has many purposes now, but it can be replaced in the future by some other material. On the other side, you might recognize copper as safe-haven assets because of its importance that increases over time. Almost every day, science, the industry find new ways to use copper.

    Can you see where the essence of safe-haven assets? It is permanent. We cannot ever say that some temporary high valued asset belongs to the corpus of safe-haven assets. 

    Is gold the ultimate safe-haven asset?

    For many investors, gold is a safer asset to buy and hold, safer than cash, because it is a tangible asset. Further, no one can print more gold as it is possible with banknotes. This is important because it provides the value of gold not being changed in this way. From the historical point, gold served as insurance during unfavorable economic circumstances. Gold prices regularly rise when drastic events happen. Moreover, gold is negatively correlated to the US dollar. Meaning, when the dollar is strong it is costly to buy and hold. That drives gold prices lower. And vice versa. Investors know this. Whenever the US dollar was trading lower, they started piling into gold.

    What are other safe-havens?

    When the market records turbulent circumstances the value of most investments falls sharply. So, investors want to buy assets that are negatively correlated to the overall market. They are moving their investments into safe-haven assets.
    That can be defensive stocks, such as consumer goods, utility, biotechnology, healthcare. These stocks tend to resist the market’s downturn. People are buying food, drugs, they need health care and groceries.  Also, don’t think that real estate due to its lack of liquidity isn’t a safe-haven asset. The real estate has a constant income flow that can offset the liquidity. 

    Infrastructure is also safe-haven assets. So, even though the markets are going down there are plenty of ways to stay invested.

    Building a safe-haven assets portfolio will need some additional attention to optimizing returns. But the results may be quite surprising. But there are safe-haven currencies also. For example, the Japanese Yen (JPY) is seen as one of the most stable safe-haven currencies.

    Can we trade safe-haven assets?

    Of course, we can. So after we’ve recognized safe-havens assets, want to trade them. The question is how and when to trade them. The possibility isn’t questionable. Let’s say this way, a market downturn is likely to hit due to the factors you can recognize. 

    If you want to move a chunk of your portfolio into safer assets there are several things you have to consider.

    First of all, trading safe-haven stocks is practiced as a defensive tool. The aim is to overcome a declining economy as even defensive stocks may not generate a positive return. It’s true that the slow economy will let safe-haven stocks beat the market, but it doesn’t mean that you will profit.

    When trading safe-haven stocks examine the beta of stocks before investing. Beta points the relationship between the stock and the market. If the beta is 1, that means the stock price is fully correlated with the market, but when the beta is above 1, the stock is more volatile than the market, and finally, when the beta is closer to zero the correlation with the market is smaller. Knowing the beta of the stock will enable you to hedge against volatility. 

    The P/E ratio will show you if the safe-haven stocks are undervalued or overvalued. The safe-haven stocks are well-known for being undervalued.  Also, the stocks with high dividends, meaning greater than 6%, are a good pick for safe-haven stocks. At least, as much as the stock from a well-established company. Well-known brands or large-cap stocks will lose less in value than small-caps during the market downturns.

    All these factors are important and you have to evaluate them before picking your safe-haven assets and adjust your new holdings to your risk appetite.

    Currencies as safe-haven assets

    Some currencies are recognized as safe-havens. In periods when the market is extremely volatile, currency traders would like to move their cash into safe-haven currencies as protection. Those kinds of currencies are the Swiss franc, the euro, the Japanese yen, and the U.S. dollar.

    Forex traders have to pay attention to some currencies that might act differently to market shifts than others. Also, there is always a question of what currencies suit to be safe-havens. 

    Bottom line

    The “safe-haven” refers to financial assets that investors turn to protect their profit from periods of market turbulence.
    Safe-haven currencies, safe-haven stocks, gold, have historically preserved or increased their value during market downturns. They gave good protection against losses. Why shouldn’t they do such a thing for us now?

    One suggestion before doing anything in real: use our preferred trading platform virtual trading system and check the two formula pattern.

  • 52-Week High or Low – Should You Buy Or Sell Stocks

    52-Week High or Low – Should You Buy Or Sell Stocks

    (Updated October 2021)

    52-Week High/Low - Should You Buy Or Sell Stocks
    When you see a stock going to its 52-week high or low, what is your first reaction? Do you think you should sell or buy it? This is a difficult part and we will explain why.

    A 52-week high or low is a technical indicator and every investor or trader should keep an eye on these tables because it is the simplest way to monitor how our stocks are doing. For example, you want to buy some stocks and this can be the best way to check their recent prices. A 52-week high or low will help you to determine a stock’s value and usually can help to understand the future price changes. 

    Investors often refer to the 52-week high and low when looking at the stock’s current price. When the price is nearing the 52-week low, the general opinion is it is a good time to buy. But when the stock price is approaching the 52-week high, it can be a good sign to sell the stocks.

    So, the 52-week high or low values might help to set the entry or exit point of your trade.

    Prices of stocks change constantly, showing the highest and lowest values at different periods of time in the market. A number marked as the highest or lowest stock price over the period of the past 52 weeks is called its 52-week high/ low.

    How to determine the 52-week high or low

    It is based on the daily closing prices. Don’t be surprised if you can’t recognize some stock. Stocks can break a 52-week high intra-day, it may end up at a much lower price, a lot below the prior 52-week high. When that happens, the stocks are unrecognized. The same comes when the stock price hits the new 52-week low over the trading session but doesn’t succeed to close at a new low. 

    Well, the stock’s inability to make a new closing 52-week high or low can be very important.

    If you watch the prices for some stock, for example, over a particular period of time, you will notice that sometimes the price is higher than others but sometimes it is lower than all others.
    The 52-week high or low for the price of any actively traded stock (also any security) shows the highest and lowest price over the previous year that is expressed as 52 weeks.

    For example, let’s assume you are looking at changes in the price for some stock over the prior year. You found that the stock traded at $150 per share at its highest and $80 at its lowest. So, the 52-week high or low for that stock was $150/$80.

    When to buy a stock

    What do you think? Is it better to buy stock from the 52-week low record or from the 52-week high record? You can find these lists on financial sites like Yahoo Finance, for example. On one side you have stocks with new highs and on the other, you have stocks with new lows. What would you choose?

    This isn’t a trick question. If you follow the rule “buy low, sell high” you might think that some stock from a 52-week low list can be a great opportunity. You may consider it an unfortunate event and suppose the stock price will go up. Remember, you have only this information – highs and lows. Buying stocks at the bottom can be a good choice but you don’t have other important information about the company to make a proper investment decision. So, when making your decision based only on one info, you are gambling. You have no guarantees that the “bottomed out” stock will go up to the top or catch upward momentum. So, you will need more information to pick the stock from the list.

    But the dilemma may come the same with stocks from the 52-week high list. You might think these companies are successful and the progress will continue. Well, sincerely, you might be right. The company’s management is doing something good. There are a lot of chances for that stock to keep moving forward. So, you will make a slightly better guess than buying stock from the 52-week low list. 

    You see, the rule “buy low, sell high” isn’t always accurate. You don’t have any hint that stock from the bottom will ever come out.

    The 52-week high or low is just an indicator of potential buying or selling. To do that you will need more information.

    Trading based on the 52-week high

    What’s going on when stock prices are heading toward a 52-week high? They are rising, it is obvious. But some traders know that the 52-week highs represent a high-risk. The stocks rarely exceed this level in a year. This problem stops many traders from opening positions or adding to existing positions. Also, others are selling their shares.

    But why? The rise in the stock price is good news, right? Profit is growing, the future earnings outlooks are bullish. This can keep prices successful, at least for a week, sometimes for a month. If the news is really good and fundamentals show the strong result the stock breaks beyond the 52-week high, share volume greatly grows and the stock can jump over the average market gains.

    But how long can this effect last?

    The truth is (based on research, one important is Volume and Price Patterns Around a Stock’s 52-Week Highs and Lows: Theory and Evidence, authors Steven J. Huddart, Mark H. Lang, and Michelle Yetman) shows that the excess gains decrease with time. This research reveals that small stocks initially provide the biggest gains. But, they usually decrease in the following weeks. Large stocks generate greater gains initially, but smaller than small stocks do. So, excess gains that generate small stocks far pass these the larger stocks generate during the first week or month following the cross above the 52-week highs.

    This is very important data for traders and their trading strategy would be to buy small-cap stocks at the moment when the stock price is going just above the 52-week high. That will provide them excess gains in the next weeks, according to the research mentioned above.

    Intra-Day 52-Week High and Low Reversals

    A stock that makes a 52-week high intra-day but closes negative may have topped out. This means the price may not go higher the next day or days. Traders use 52-week highs to lock in gains. Stocks hitting new 52-week highs are usually the most sensitive to profit-taking. That may result in trend reversals and pullbacks.

    The sign of a bottom is when a stock price hits a new 52-week low intra-day but misses to reach a new closing 52-week low. This happens when a stock trades is notably lower than its opening, but rallies later to close above or near the opening price. This is a signal for short-sellers. They are buying to cover their positions.

    Bottom line

    To conclude, the strategy of buying stocks from the 52-week high list breaks the rule buying low. Yes, but hold on! The rule “not buy at high” can be applied to stocks that unnaturally bid up some kind of market over-reach. For example, the stock whose price has surged 30% over a single day. Drop it out! Neglect them.
    You want stocks with steady growth over a long time into the list. When you recognize such stocks, start to evaluate them. Examine every single detail about the company.

    Buying for bargains is a good strategy, but it is also a good cause for selling a stock at or near its 52-week low.

    Finding the winners can be trickier. One suggestion, start from the top and eliminate every stock with an unrealistic increase. They are on the top by mistake, trust us. Find stable winners. Do we have any valid proof that they will not continue to rise? Of course, they can.
    If you want to trade based on the 52-week high effect, keep in mind, it is most functional in the very short-term. The largest profits come from rarely traded stocks with small and micro-cap.

    Remember, the 52-week high or low represents the highest and lowest price at which a stock has traded in the prior year, expressed in weeks. It is a technical indicator. The 52-week high describes a resistance level and the 52-week low represents a support level. Traders use these prices to set the purchase or sale of their stock.

  • How to Create a Trading Plan

    How to Create a Trading Plan

    How to Create a Trading Plan
    A trading plan is a set of rules and guidelines that define your trading performance, financial goals,  rules, risk management and criteria for entry and exit positions.

    Why is it so important to know how to create a trading plan? Because if you know how to create a trading plan, you’ll know on which market to trade, how to cut your losses, when to take profits and find other opportunities for investing. But first, we have to understand what a trading plan is.

    A trading plan is…

    It is a full decision-making tool that helps you determine what, when, and how to trade. Every trader has an individual trading plan suited only for her/his style, goals, risks tolerance, capital available, motivation for trading, the market you want to trade. 

    A trading plan is a methodical tool that helps traders to identify and trade securities. If you want to have a successful trading plan you have to take into consideration a number of variables such as time, risk and goals. A trading plan gives you control of how you will find and execute trades, the conditions you will buy and sell assets. Moreover, it determines how large a position you will take, how to manage it. Also, your trading plan will determine what assets you can trade, as well as when to trade or when not to.

    But there is also one important step more. Never invest before you make your trading plan because your capital might be at risk. A trading plan will guide your decision-making process.

    To know how to create a trading plan you must understand it is different from a trading strategy. Trading strategy means you know how and when to enter and exit the trade.

    The benefits of knowing how to create a trading plan

    Since the trading plan defines the reasons why you are making a trade, when and how you are making a trade, it is an outline of all your trades. If you follow your trading plan, you’ll be able to minimize errors and losses.

    Okay, creating a trading plan isn’t the most exciting thing you can do in your lives, and maybe that’s the reason why so many traders think about it as an irrelevant thing. How to think about the trading plan while some sexy things jump every second? News, charts, trend lines, hot stocks are more exciting, right? Wrong!

    Without a trading plan, you cannot use all these sexy tools, you have to couple them with your plan to produce reliable results.

    What do you think now, do you need to know how to create a trading plan?

    Frankly, the trading plan is not necessary to make a trade. You can trade without a plan. But, if you want to hit the road of successful traders, you will need it. We are pretty sure you don’t want a hold-and-pray strategy because it isn’t a strategy at all. It is a sure way to lose everything you have. Maybe it’s better to go to a casino where there will be more chances to win something. Remember, trading isn’t gambling. 

    And without a trading plan, you’re gambling. The truth is that you may have some winning trades from time to time, but your progress will be questionable. Your losses will be bigger than gains, think about this and do smart trading. Learn how to create a trading plan, so create it.

    How to create a trading plan?

    Follow the old saying: If you fail to plan, you plan to fail. Every trader should follow this expression as it is written in stone. While trading you have only two choices: to follow a trading plan and have a chance to win or trade without a plan and lose with almost 100% possibility.

    So, let’s create a trading plan and see what you have to take into consideration while doing that. Here are some hints.

    First, set your goals. 

    What do you want to get from the trade? Please, be realistic about your expectations toward profits. This will come with a bit more experience. Experienced traders, for example, expect the potential profit triples the risk.

    Can you see how much you have to be focused on risk? So, you must focus on risk. Your trading plan has to mirror your risk tolerance level. You have to determine how much risk you are willing to take. How much of your portfolio are you willing to risk on one trade? And you have to do that for every single trade. The regular risk range is from 1% to 5%, but usually, it is 2%. If your account is small you can take a bit more risk to get a bigger position. But if you lose a predetermined amount at any period in the day, you get out and stay out. Take a break, and then attack another day, when things are going your way.

    Do your research before you enter the trade. 

    Explore the big winners, take a look at the stock charts and find possible spurs to the value of a stock. Be careful while doing this. Your research has to be accurate as it can help you discover if the stock is going to perform in your direction. You can’t be sure 100%, but it will be easier for you to know that you did everything possible to avoid losses.

    Importance of entry and exit in a trading plan

    Every serious trader plans entries and exits. This means you must have a plan on when you enter the trade and where you exit. For that purpose, we are recommending our tool. 

    You must give equal importance to the exit of a trade if you want to make a profit.
    Set a stop-loss, to secure your pull out if things aren’t going in your direction. But you really have to get out at that point. Do you know your profit target? Get out when your profit target is met, don’t be greedy. 

    Take a pen and write down your plan

    Exactly. It is the best way to show how responsible you are toward your capital invested. It is your hard-earned money, you don’t want to fool around with that. Put your trading plan in a visible place, stick it to your computer, for example. Yes, we are recommending your trading plan has to stare at you all the time while you are trading.

    When you exit your trade, review it afterward. You will need to study how the trade went. If something was right or wrong you will be able to repeat or avoid it. So, take notes and keep them in your trading log.

    What do you have to determine else?

    Your stock trading plan should include additional factors to ensure it is completed.

    First is liquidity

    Liquidity can be a problem. When trade stocks this can be a serious element that needs to be considered because you can find a lot of stocks with very low liquidity. This doesn’t mean you should trade only large-cap stocks. You wouldn’t like to limit your opportunities.
    Just filter out the stocks without enough turnover to get in and out of the market quickly. For example, you can trade stocks that have an average daily turnover of 10 or 15 times the size of the position you want to take. Don’t avoid small stocks because they can provide you to trade wider.

    Second is volatility

    Your trading plan should take into account the volatility of the stocks. Some stocks are more volatile some less but, generally speaking, the stocks are volatile. This should befall your trading rules as part of a trading plan. So, adjust your trend filter for the volatility of the stocks. You may have a lot of benefits using that. Your trading plan should be adjusted for what you will do if stocks go bankrupt or are taken over at a premium. You have to position yourself if it happens and you have to do so in advance to protect your overall portfolio.

    Bottom line

    A trading plan should consist of all these factors mentioned above. The stock liquidity, volatility, risks, goals. Consider them when writing it. But even if you do this and more, there is no guarantee that your trades will make you money. As we said numerous times, the stock market is a zero-sum game. It is a system of winning and losing. You have to be prepared for that. One day can be extremely successful but the others could be a total disaster. There is no profit without risk and you can’t always win without an occasional loss. Remember, if you lose a battle, you may win the war. Don’t expect every trade to be a success and every stock in your portfolio to be a winner. Let your profits rise and lower your losses. That’s the way to win this game. 

    We hope you have a better picture of how to create a trading plan now.

  • ROI or Return On Investment – The Efficiency Of Investment

    ROI or Return On Investment – The Efficiency Of Investment

    ROI or Return On Investment
    ROI is a useful method to compare different investment opportunities, but it has limits

    ROI or Return on Investment estimates the gain or loss created on an investment related to the amount of money invested. Investors use ROI to compare the performance of different investments or to compare a company’s profitabilities. In essence, the Return on Investment measures the gain or loss of some investment relative to the capital invested. 

    The main goal of investing is profit, so it’s essential to seek investments that give the biggest potential return. ROI or Return on investment is the ratio of profitability that measures how big return will be on some investment relative to the costs. Commonly, you can see ROI as a percentage. This measure is very important when you want to evaluate an investment.

    Also, ROI is a valuable tool when you want to compare several investment opportunities. 

    For example, you have some dilemma in which company to invest in because you saw several interesting options. And it seems that all of them are good. What are you going to do? Of course, you are going to estimate the efficiency of each company particularly to reveal which one is able to generate more profits.

    How to calculate ROI or Return on Investment?

    To calculate ROI just divide the net return on investment by the cost of investment and multiply the result by 100 since ROI is expressed in percentages.

    The formula looks like this:

    ROI = (Net Return / Cost of Investment) x 100

    For example, you invested $10.000 in some stock a year ago. Now you sold it for $15.000. Let’s calculate the return on your investment.

    $15.000 – $10.000 = $5.000
    Your net return is $5.000. Let’s go further by following the formula. 

    ROI = ($5.000/$10.000) x 100 = 50%
    And you find ROI on your investment is 50%. The calculation is quite simple.
    To calculate ROI you can use this formula too:

    ROI = ((Final Value of Investment – Initial Value of Investment)/Cost of Investment)) x 100%

    Calculate ROI for different investments

    The basic ROI formula reveals how much an investment generated overall. But, if you want to compare ROI from several investments, you will need to take into consideration the amount of time needed for some investment do give you return.

    For example, let’s say you want to compare the ROI from two separate investments. Let’s do this using our previous example. The capital invested is $10.000. One year later you sold the shares for $15.000 and gained $5.000, so the ROI is 50%.

    But two years prior to this purchasing you bought some stake of shares of the other company and you invested, let’s say, the same amount of $10.000. After 3 years of holding it, you sold these shares for $16.000.

    Let’s calculate the ROI for this investment.

    ($6.000 / $10.000) x 100% = 60%

    ROI is 60%. Great! 

    Wait for a moment. It just seems that this second investment yielded a higher ROI. You had to hold this investment 3 years to generate a return of 60%. In other words, time matters. 

    The first investment generated 50% after one year, the second returned more but after 3 years. It generated 60% which means the annual return of just 20%. When you compare these two investments and their annual yields it’s clear that you made a better investment decision in the first example. To put this simply, even if you have a better overall return on some investment think about the amount of time you needed to reach it. The annual ROI is what will tell you about how good your investment is. Do it for each investment in your portfolio and you’ll figure out the winners.

    The other methods to calculate the return

    There are more precise methods to calculate return on investment. ROI isn’t the only one and has its limits. 

    To be honest, calculating ROI is an excellent way to compare investment chances. But one of the limitations of ROI is the lack of risk estimation. ROI formula doesn’t factor it into consideration. The risk estimation is very important particularly when you need to calculate actual returns. ROI is good to show you a potential return on your investment. But will it tell you how much you can lose? Not necessarily. 

    You must know that higher returns are in tight connection with more risk. The Higher returns, the more risk involved. This is particularly true for stocks. They have higher returns than bonds, for example, but at the same time, they are riskier. 

    Almost the same is for companies. When the company has a lower credit rating, it will offer a higher interest rate on bonds to balance the investors’ risk. 

    For example, you purchased the bonds from a company described above. It offered you much higher returns on its bonds and you might think it is a better opportunity than some company with good credit rating. And you made a calculation and saw ROI of, let’s say, 60% after one year. So, let’s see why it wasn’t a smart decision. What will you do if that company fails to pay interest rates? Well, you’ll end up literally without any returns. 

    Can you see where the point is? ROI is great but it measures only the potential return on investment, not actual. For proper decision, you will need a Real Rate of Return that takes into account inflation, taxes, and other factors. Also, the Net Present Value (NPV) is more suitable for investors like to estimate returns in the far future.

    This metric is helpful

    As most important, it is a simple metric, and easy to calculate and understand. You cannot misunderstand it. Moreover, it is a general measure of profitability applied everywhere all over the world. When you see that some investment has an ROI of 30% that is the same in the US or Europe or Africa. Thanks to its simplicity ROI is good enough for estimation the efficiency of a single investment or to compare the returns from several different investments.

    What is a good ROI?

    Investment returns must beat inflation, taxes, and fees because no one would like to hold an average investment. We all need excellent investments. That’s the whole wisdom, to earn a higher rate of return on investments. 

    A good ROI depends on the investment. The truth is that you have to keep expectations rational. For example, if you are expecting to gain 20% from blue-chips over the next 10 years, we have to say your expectations are pretty much unrealistic. It isn’t going to happen. Whoever promises you that, plays on your inexperience. For instance, the stock market’s average annual return is about 10%, for more aggressive investors it was about 15% per year. And it was almost the same for the last 100 years. Take it or leave it. Whoever promises you a moon is lying or trying to fraud you. 

    Bottom line

    ROI or Return on Investment calculation isn’t an accurate metric but it is a good way to reach the approximate figures. You can always expect some deviation or error in ROI calculation.
    ROI is rated as the single most significant measure of the efficiency of an investment. A better ROI means that investment has satisfying results. When you want to compare the ROI of different investments it is important to compare the companies from the same or similar sectors.
    This metric is very connected to what happened in the recent past. You have to follow a simple rule of thumb: the lower the recent returns, the higher the future returns. And vice versa.

  • Exit Strategies For Smart Trading

    Exit Strategies For Smart Trading

    Exit Strategies For Smart Trading
    Most traders fail because they don’t have the exit strategies but they are maybe more important than entries. 

    Exit strategies for smart trading mean that you as a trader know where to stop losses and take the profit. Of course, you can’t do it randomly by setting stop-loss at 1%, 2%, 5%. Anyone who wants to become a trader must know the statistics: 90% of traders lose money when trading the stock market. Well, 10% make money all the time. Traders-Paradise’s aim is to show you how to trade smart, how to enter the elite club of 10%.
    Everyone seeks to be in the 10% who make money, but the number of those who really want to devote is surprisingly small. You will need exit strategies for smart trading. 

    But there is a problem. Exiting a trade makes traders hesitant. We want to explain exit strategies, their importance, and give you a chance to make a profit, not a loss. In simple words, we’ll explain to you how to do “smart trading”.

    Trading is easy but you need the know-how 

    Stop-loss (S/L) and take-profit (T/P)  are the two main points that traders have to plan ahead when trading. Successful traders know there are several possible results in trade. They know that they can exit too early or too late and miss out on the profit. The other solution is to exit a trade at an accurate time which results in making money. We want you to look right there, to the point where you can exit your trade in profit.

    Have you ever heard saying “let your profits run”? Well, some will run for a long time but some will fall on the start.

    If you want to earn in trading stocks you have to do something that others don’t. You need an exit strategy established for each trade. This means you must have a trading plan.

    Knowledge united with experience and effort to produce success

    To make this clear, you will not find any consistently profitable trader who will tell you that relies on luck. Every successful trader has great knowledge, experience, and trading goals.

    Some statistics tell us that learning to trade stocks requires two to five years of experience. Well, that’s hard work and commitment and there are no shortcuts. Don’t be worried or give up now! Trading stocks isn’t rocket science! The interesting thing with rookies is most of them seek for complicated solutions. Don’t let be seduced by gurus in the industry. The whole thing can be very simple.

    The exit strategies for smart trading

    One of the exit strategies for smart trading is to use targets to book partial profits. How does it work? Before you enter the position you have to define targets and when they come, take some part of your position off for profit. The portion of how much you’ll take off depends on your risk tolerance and trading plan. An experienced trader will take off 1/3 of their position or even half when the first target is scored. 

    Advantages

    This has several advantages. The stock market is volatile and stock prices are shifting direction quickly, so it is smart to book a part of the profit because you will not like to look at the market going against you. It is a bad experience and painful. So, try to avoid that. Well, when you take off some part of the profit, you will still have the other portion in the game. Smart enough? Anyway, this trading plan is simple. But there are plenty of other exit strategies for smart trading. 

    One of them is profit targets which means to identify the profit targets for the current cycle of stock. You would like to know where the price is possible to go. The point is to determine if you have to get out or stay in. But placing profit targets shouldn’t be randomly placed. So the most important feature you need is to check if your exit strategy is good. How can you do that – find HERE. This a game-changer. Check it out! Note, you shouldn’t place your profit targets too far away or too close.

    Stop-Loss strategy

    Did you make your first stock trade? What are you doing now? Are you relaxing and waiting to become a billionaire? Don’t do that! Even if you see your stocks running higher there will be one or few starting to fall. What are you going to do now? You have to know that just one loser can ruin your whole capital. 

    The point is that the stock market is risky and all money that you invest in stock may end up in 100% loss. Of course, you shouldn’t stop investing and trading. So, just take some steps to ensure that you reduce your losses. There is a way to do it. If you place a stop-loss, you practically ensure that your losses do not exceed a specified amount. A stop-loss order means to sell a stock when it enters an established price or percentage. For example, you bought a stock for $100 and you don’t want to lose more than 7%. All you have to do is to place a stop-loss order at $93. If your stock drops below $93 your stock will be automatically sold. The other possibility is your stock is going up. So, let’s say, it trades at $160. That’s a very nice profit of $60 or 60%. What can you do? Just lock in profit at $130, for example, and set a stop order at the same amount. 

    The benefits

    A stop-loss strategy provides you to stay in the game. If you put a 4% stop on your trades, you will never lose more than 4%, for example. It is simple, yet many traders do not use it. Moreover, they don’t have an exit strategy. We have to say, that isn’t trading, that is gambling.

    What stop loss percentage should you use? Some experts’ recommendation is 8%. At the moment you buy a stock, immediately put a stop-loss at the level you are willing to lose. Nothing less, nothing more. You can adjust your stop-loss order depending on the stock price direction. 

    Why exit strategies for smart trading?

    Exit strategies boost assurance and profitability. Calculate reward and risk levels before entering a trade, find a strategy to exit the position at the most profitable price, no matter if you are taking a loss or a profit.

    The traders caught the losses due to a lack of exit strategy from the trade before they entered the trade. 

    The majority just take the position in the stock market. Do they have any idea of where to exit the position? What to do if the stock moves in both beneficial or bad directions? A lot of traders ask for help after taking a position. Hence, you should never fall into that trap. You MUST have exit strategies for smart trading. Otherwise, you will lose your capital, home, family. Exit strategies bring discipline. It is important for every trader to take out the profit at the right time. Let us ask you something. Why are you trading stocks? To make money, of course. That’s why you are in the stock markets. Taking profits is the main goal, right? That is possible only and ONLY if you have an exit strategy.

  • 80/20 Investing Rule – Pareto principle

    80/20 Investing Rule – Pareto principle

    80/20 Investing Rule - Pareto principle
    80/20 investing rule or Pareto principle is great for individual investors who don’t like conventional rules. It isn’t difficult but could increase the chances of your profit. 

    Let’s see first what is behind the 80/20 investing rule or Pareto principle. 

    It’s a saying, which claims that 80% of both outcomes or outputs is a consequence of 20% of all inputs for some event. The 80/20 investing rule is frequently used in many fields not in investing only.

    But our subject is investing, where the 80/20 rule means that 20% of the holdings in a portfolio are in control for 80% of the portfolio’s growth. Well, this 20% can be in charge of 80% of the portfolio’s losses. 

    For example, you can build a portfolio of 20% growth stocks and 80% bonds which are less volatile investments. The 80% will provide you a nice and stable return since the bonds are low-risk, while the 20% in stocks that are considered as the higher-risk investment could give greater growth and higher profit.

    Also, you can add to your portfolio 20% stocks in the extended market that cover 80% of the market’s returns. But this can be too risky because the stocks are unpredictable and volatile.

    Okay, you wouldn’t believe that the market rises 80% of the time, right? But it is true. But does the market drop 20% of the time? The best way to check this is to check it by yourselves and you will be surprised as well as we were. Advanced traders and investors use this 80/20 investing rule as a great advantage. 

    How to use the 80/20 investing rule?

    Examine your investment portfolio and think which of your investments result in 80% of the returns. What can you see? The stocks are what generates most of the returns. 

    If it is needed, don’t hesitate to cut off a stock if it looks like it falls into your 80% of your overall investment portfolio in terms of returns. Anyway, we want to give some ideas on how to use the 80/20 investing rule and become a better trader.

    First of all, you have to finish some tasks such as evaluating how strong your earning power is and to know the inventory of your assets in the portfolio. What are your best assets in terms of investing? You must know that your portfolio is your financial house and you have to keep it in order. You can do that only if you measure and estimate from time to time but actually frequently. Be reasonable, not too frequently. You don’t need the stress. All you want is to avoid unnecessary risks. Okay, you did this task and periodically just go over these figures to check if they follow your investment plan. It is vital for investing to check the current and potential earning power from time to time and keep an eye on your outgoings.

    Let’s follow the 80/20 investing rule.

    Investing success depends on a few resolutions. For example, the simplicity of your investment strategy and portfolios.

    The main aim of investing: Never lose money. That is the rule No1. This means never bet on price changes and rising markets. You need to build an investment portfolio able to follow this rule. Well, we have to be honest, there is no trader or investor that came into the safe zone and comfortable position with speculating and risking in the stock market. Too many risks will more likely lead you to large losses, not to the profits.

    Benjamin Graham said:

    “Investment is most intelligent when it is most businesslike.”

    What is the right meaning of this saying? Managing the investments is like you are running your own business, your company. So, you have to respect some principles that could lead you to success.

    The 80/20 investing strategy

    The 80/20 investing strategy is all about increasing the chances of your investment success. Actually, it is all about how to unite your portfolio strength and its resources. But, the 80/20 rule has nothing to do with asset allocation. It is wider than that. The goal is to achieve the highest returns possible.

    80/20 rule investing means intelligent investing.  

    At its essence, the 80/20 rule requires you to recognize the best assets and by using to achieve maximum returns. To do that you don’t need complex math, it’s just a rule.

    When the markets are overvalued, why do you have to buy? The risk of loss exceeds the potential return, right?

    The 80/20 investing strategy will reduce levels of volatility as we described and reduce the drawdowns. Your assets will really “compound” over the long-term. One of the easiest ways to manage this strategy is to use a moving average crossover. The principal is quite simple. Stay in stocks when the S&P 500 index is above the 12-month moving average, and you change to bonds when the S&P 500 falls below the 12-month average.

    Pareto principle

    Let’s say your portfolio has many holdings. But it doesn’t matter how many holdings you have, the 80/20 rule or Pareto Principle applies. To win by using the 80/20 rule, you have to keep in mind a few things.

    Firstly, 80% of your profit depends on 20% of your activities. You can spend a lot of time choosing some great stock, evaluate it, estimate, try to figure out where to set a stop-loss, basically, you have just a few tasks that should be in your focus. Yes, few but they will generate you a profit.

    So what do you have to be considered about? What steps do you have to take? You should know your ideal allocation based on your risk tolerance. Also, you have to rebalance it periodically. Can you see? Just two steps, but important though. With these two simple things, you will have success more often.

    And you will see that 80% of your returns come from 20% of your holdings. How to choose the winners? Well, you know, they are companies built to succeed for a long time.

    Bottom line

    80/20 investing is excellent for individual investors who don’t like to follow conventional rules. It isn’t complicated but could easily increase the odds of your success. Just remember that 80% of your returns arrive from 20% of your holdings. Try to find the winners in your portfolio, play on them and look at how your portfolio will become worth and rise in value. 

    This 80/20 investing rule or Pareto principle is visible in almost all areas of our lives. The 80/20 rule was developed by Vilfredo Pareto in Italy in 1906. He was an economist and he saw that 20% of the pea pods in his garden produced 80% of the peas. After that, he revealed that 20% of citizens in Italy hold 80% of the land. Well, did the 80/20 investing rule grow in Pareto’s garden? According to the legend, yes.

    You can find little scientific analysis that either proves or disproves the 80/20 rule’s validity. But the fact is that many financial advisors and consultants have the 80/20 investing strategy as an offer. Moreover, they have extremely good results.

Traders-Paradise