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4 Neural Network Powered Systems - 1 price -click below for your free trial-
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1. Question - I typically have $1,000,000 invested in 40 different positions. What bothers me is the practicality of moving from a 100% invested position down to a 75% invested position the next morning. What if all my stocks appear to be okay? Do I sell a little of each or do I close out 10 positions?
Answer - If all your individual positions are in good shape you can short SPY and accomplish the same goal. SPY is the S&P500 tracking index, which trades like a stock. The amount to short depends on the type of stocks you have in your portfolio. Some investors specialize in low beta dividend type stocks while others invest in high beta speculative issues. Let's look at these two extremes.
There may be other alternatives to using SPY as a vehicle, such as S&P 500 futures contracts. However, I don't trade futures and this website isn't oriented in that direction.Low Beta...
If your average beta is .80 you would need to short $250,000 x .8 = $200,000 of SPY to, in effect, move your portfolio from 100% invested to 75% invested.High Beta...
If your average beta is 1.75 you would need to short $250,000 x 1.75 = $ 437,500 of SPY to, in effect, move your portfolio from 100% invested to 75% invested.
2. Question - Tonight I noticed that the Average Risk Investor was 66% invested while the Gigantic Risk Investor was only 46% invested. Is this right? To me, average risk means less invested than giant risk.
Answer - Since I was a kid I‘ve heard the adage, "The market has a natural upward bias; therefore the average investor should be 100% invested at all times." I've been investing in stocks for more than 35 years now. From my perspective risk isn't totally about how much money I can lose. It also entails lost opportunity cost for not being 100% invested. To me, the risk of being 125% invested is about the same as being 50% invested. Stock-Optimizer also considers risk in terms of deviation from 100% invested.
Many people think a low risk investor wouldn't touch stocks at all. He'd most likely invest in bonds and/or certificates of deposit. On this website, a Low Risk Investor refers to a low risk stock investor. Such a person is comfortable when invested at about 50% but, on rare occasion, will use a slight amount of margin or be slightly net short.
With Stock-Optimizer, the farther you are from 100% invested, the higher the risk. In the case you mention above, the Gigantic Risk Investor @ 46% invested is 54% away from 100% (100% - 46% = 54%), while the Average Risk Investor @ 66% is 34% away from 100% (100% - 66% = 34%). Since 54% is greater than 34%, the Gigantic Risk Investor is more "at risk," as risk is defined by Stock-Optimizer.
You will find that the Average Risk Investor will almost always be closer to 100% invested than the Gigantic Risk Investor. Your question suggests that risk increases as you get further from 0% invested, not 100%. While this may be true at a particular point in time, very low investment levels will not maximize your investment return over the long-term. You will manage risk well by following the Stock-Optimizer investment instructions given for your investment profile.
3. Question - Why did you pick 7 market days for the outcome result - why not 5, or 10, or some other time period? 7 market days seems an odd number? Perhaps you got the highest result correlation at 7 days, but I'm just guessing.
Answer - Good question and great guess, you are 100% correct. I ran correlations on each day and outcomes correlated best at 7 days. There was a steady decline thereafter.