Los Angeles Finance Examiner: Beat the Market & Lower Risk – ‘Wall St. play any investor can use’
Many ‘Tricks of the Trade’ are not applicable or even relevant to the normal day to day trader or public investor but here is an old play with a new spin that anyone can use and appreciate.
You will hear most channels of information say that the level of a Fund Managers performance is based on whether he does or does not beat the market. While I do not necessarily agree with this I will show you how an average investor can consistently beat the market every year while actually cutting their overall risk by nearly half.
This process use to be done by ‘those of the world’ with a combination of artistic long positioning, shorting, and leveraging….it also required high levels of capital…. but thanks to recent products (mainly ETF’s) the same strategy, theoretically, can be implemented easier, more efficiently, and by any level investor.
Theoretical example of how this works.
Investor has 10,000 to invest. in the market…..the product for this example will be the general S&P.
The S&P trading index is known as a ‘Spider’ ticker SPY
Their is also an ETF ticker SSO which represents twice the SPY. SSO is a leveraged S&P holding meaning that its daily move seeks to match 2x the SPY, whether that be up or down.
…so how do you beat the market every year while cutting your risk by nearly half?
Instead of putting 10,000 in the index, in this case the S&P, put half (5k) in the double leveraged ETF (ex. SSO)
Your 5,000 in the SSO will move as if you had 10,000 in the SPY but since only half of your capital is in the position your risk is in essence cut in half (from risking 10k to only 5k)
You then take the remaining 5,000 and put it into a more secure Fixed Income position (ex. bond, CD, savings, etc.) that will add on an estimated 3+% depending on your risk tolerance and product selection.(ex. CD @ 6%)
The higher the interest you make on your Fixed Income Investment the higher your spread when beating the S&P….but note the higher the interest rate the higher the risk that 5k endures.
Example 1: (simplified) Market Incline
10,000 SPY annual 12% = 11,200
5,000 SSO annual 12%.x2 = 6,200 + (CD)5,000(1.06) = 5,300 = 11,500
Example shows a beating of the market of 3% while reducing risk by nearly half.
Example 2: (simplified) Market Decline
10,000 SPY annual (12%) = 8,800
5,000 SSO annual (12%).x2 = 3,800 + (CD)5,000(1.06) = 5,300 = 9,100
Example shows limited risk and the paring of losses.
Each index and most sectors have double leveraged ETF available.
Note that beating the market does not mean that you will not lose money…you will simply lose less than the alternate.
One should note that SPY & SSO as well as any ETF, Stock, Securities or alternative investment will posses a level of risk that is not appropriate for all and can result in a loss of investment funds. One should discuss any investment decision with a professional as to understand all the risk involved.
Disclosure: Author is long SSO and has no position in SPY
*The following is to be taken as market commentary and general observation. It is in no way to be taken as advice or personal recommendation.
-Walid N. Nasserdeen
