Make Greater Profits with Less Risk

EditorAll investors want the same thing… more profits with less risk.

Of course, that combo sounds a lot like “having your cake and eating it, too”  which we’re told is impossible.

But I’m here to tell you today that, when it comes to your investments, it is possible. (I can’t say the same about cake.)

You see, there’s a simple risk-reduction technique that you can use in the stock market to both increase your returnrns and cut your risk in half. But the technique is widely misunderstood.

In fact, most investors (mistakenly) think this risk-reduction technique is inherently risky. So they naively forego using it… even though your portfolio needs it to smooth out the natural up’s and down’s that come with investing.

Let me explain…

The risk-reduction technique I’m talking about is called “short-selling” (betting against a stock with the expectation that its share price will fall).

Wait! Don’t go just yet.

Hear me out.

Yes, when used in isolation, short-selling can be a risky venture.

But when you use short-selling as a risk-reduction technique together with a returnrn-generating investment, it can do wonders for protecting your stock portfolio from wild swings.

Let me show you a real-world example

Take a look at this chart and then tell me which portfolio you would prefer to own – A or B:

chart 1

Portfolio A, obviously! Everybody wants more profits with less volatility, right!?

I’ll tell you what’s inside Portfolio A in a minute. But first, let me explain why I built Portfolio A for Boom & Bust subscribers.

It was September 2014… and I was in a pickle. Our demographic research told us global economic growth was slowing significantly. Meanwhile, U.S. stocks were expensive and trading at all-time highs. That’s a tricky combination!

I didn’t want to tell our readers, “go to cash!” After all, cash yields nothing… and are you really an investor if you’re just sitting in cash?

And even though stocks were expensive by historical standards, the Federal Reserve was doing all it could to support the price of risk assets, which only pushed U.S. stocks higher and higher. As I told subscribers: “Since the Fed’s intervention is artificial, it’s anyone’s guess when the music will stop.”

That was the crux of investors’ dilemma back in the fall that year. How do you stay invested in case the Fed’s music carries on, while protecting yourself for when the music stops (as it always eventually does)?

My solution? The risk-reduction technique of short-selling.

That’s how I created Portfolio A.

Specifically, I told Boom & Bust subscribers to:

  1. Buy shares of the SPDR S&P 500 ETF (NYSE: SPY), and
  2. Sell short shares of the iShares Emerging Market ETF (NYSE: EEM).

The idea was simple…

If stocks fell… emerging-market stocks would fall further than U.S. stocks.

And, if stocks rose… U.S. stocks would rise further than emerging-market stocks. Either way, Portfolio A would come out ahead as U.S. stocks were poised to outperform emerging-market stocks… in up and/or down markets.

And that’s exactly what it’s done.

Over the last 20 months, Portfolio A has returnrned 12.5%… while the S&P 500 has gained just 3.6%.

Not only has Portfolio A gained more than three times the returnrn of the S&P 500… it’s done so with considerably less volatility.

The S&P 500 has experienced 16% annualized volatility versus just 5.4% for Portfolio A.

Higher returnrns and less risk – that’s remarkable!

Now, if you happen to be one of the many investors who’ve shied away from short-selling – for whatever reason, good or bad – I’ll ask you to take another look at that chart above.

Wouldn’t you prefer the experience of Portfolio A – higher returnrns and less volatility – even if it involved just a little foray into the short side of the market? Isn’t it well worth it?

It’s not complicated… and it’s not risky.

In fact, I think this risk-reduction technique is a must-have for your investment portfolio in the coming year. That’s because all the factors that were in place in September 2014, when I first designed Portfolio A, are all still the same today.

Nothing has changed!

Global growth is still slowing.

Stocks are still expensive.

Cash still yields nothing.

And the Fed is still the biggest artificial factor, and wild card, in the market. So, if you want to position your portfolio for profits and protection… I highly recommend joining Boom & Bust, where we’ll point you to the best high-returnrn, low-risk opportunities available in the market today.

To good profits,

adam's signature

Adam O’Dell, CMT

Chief Investment Strategist, Dent Research