Embracing the four great risk minimizers in a volatile market
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]
1. Thou Shalt Not (not ever if possible) Invade Principal. .. working capital (as defined in “Brainwashing”) is your Principal. This is the amount you’ve invested, plus the realized earnings you have had on your investments. Principal grows with profits, contributions and income; it is reduced by losses and withdrawals of any kind.
2. Thou Shalt Not Speculate or Gamble; thus you must have some consistent method for measuring the fundamental QUALITY of the securities you own… income to shareholders and profitability requirements are a good start for all securities, add a viewable five year track record for derivatives of all kinds and colors. Stick with professionally managed portfolios for options, commodities, real estate, etc.
3. Thou Shalt Not have more than two “Purpose Buckets” in your portfolio: Income and Growth, and all Asset Allocation and DIVERSIFICATION calculations must be based on Working Capital as opposed to Market Value. Market value can vary significantly from cycle to cycle; if you follow these commandments, working capital will move steadily higher. Your growth bucket percentage should be shrinking as you get older.
4. Thou Shalt Not own any security that does not pay some form of interest or dividend INCOME, keeping in mind that all portfolios eventually become retirement accounts and the sooner you start growing the income, the better.
5. Thou Shalt Not forget to TAKE reasonable PROFITS, at predefined targets based on the current market environment. The more frequently you trade (i.e., take profits on one security and reinvest the proceeds in another), the faster you will grow your principal (working capital) and your income.
6. Thou Shalt Not ever borrow against the market value of your securities, period.
7. Thou Shalt Not invest in or worship things you do not understand, that have time constraints in which you must act, or which may bring you ownership of something you don’t want. “Total Return” numbers (for example) are illusions used to compare growth purpose securities with income purpose investments, another Wall Street creation that cannot be used to buy anything unless you sell the securities… not nearly as important as income.
8. Thou Shalt Not hold as much as 5% of your portfolio in any one security, or 15% in any one sector or industry, again, end of discussion. Less is definitely better.
9. Thou Shalt Not use dollar cost averaging or automatic dividend reinvestment of any kind, because it destroys diversification and reduces portfolio yield on invested capital. All income and deposit capital must be selectively reinvested in new securities or used to reduce position cost basis and increase yield.
10. Thou Shalt keep your Income Purpose Bucket as fully invested as possible, while keeping a cash (money market) reserve for known expenses within the growth bucket of the portfolio. Emergency cash should be kept elsewhere.
NOTE: The items highlighted in BOLD CAPS are “the four great risk minimizers” for your investment portfolios… particularly in an environment of ever increasing volatility across all markets.