Friday, September 03, 2010

Capital Preservation Strategies

Capital Preservation
Capital Preservation Strategies Can Magnify Long Term Returns

A simple technique exists to multiply your portfolio value over the long term.

Do you know what September 12, 1996 and March 9, 2009 have in common?

HINT#1: A buy and hold investor made 0% return over this timeframe of 12.5 years

HINT#2: An investor practicing a simple technique made a 153% return during this same period

ANSWER: The S&P500 index was at the SAME LEVEL of 666 during both of these weeks!

The simple capital preservation strategy employed in the above example was a basic stop loss triggered when the index dropped below its 30 week moving average.

Obvious this is a very simplistic and crude example, but it highlights the difference in results that can be achieved depending upon what strategy you use in the markets. A well-refined capital preservation strategy would have been able to generate even larger gains from the
same situation.

The Value of Time in a Good Strategy

Time plays a crucial role in determining the effectiveness of any good strategy and is also a measure of efficiency.

Lets compare the 2 scenarios above:

Buy and Hold

In the above example the buy and hold investor had their capital tied up in the market for a total of 12 years and 6 months. The unfortunate part is that they generated a 0% return. (In actual fact, they generated a negative real return when you consider the eroding impact of inflation)

Capital Preservation

The investor practicing crude capital preservation strategies was still able to generate a 153% positive gain, and only had their capital tied up for 8 years to generate this gain. The capital preservation example was more efficient because it generated a larger return in a shorter period of time.

Now . . . How to Magnify These Results

Here is the real kicker.

The investor practicing capital preservation could have easily invested into another sector at that time his capital
preservation strategy took him out of the S&P500 index.
If they had invested into another trending sector at that time, their returns would be substantially higher.

Combining Strategies Magnifies Results

Now imagine what the effect would be over the long term if your portfolio practiced these simple techniques of capital preservation and market timing to consistently apply a strategy that rotated into the top performing sectors of the market, while preserving your gains at the same time?

Click here for more Capital Preservation Strategies and Magnify Your Long Term Returns