http://www.onwallstreet.com/video/?id=2679576&page=1

Look at the money protected by SmartStops recently on AAPL, CMG, NFLX etc.

So, what can we expect for the year ahead?  Nobody knows for sure, but measurements of market risk are sending signals that this may be a good time to buy.

The VIX, a measurement of implied future volatility, remains low at just 13.26.  This has partly been influenced by the continued quantitative easing by the Fed which results in a great deal of liquidity in the markets and lower volatility.

According to SmartStops.net’s market risk signals, the percent of S&P 500 components currently in the above normal risk state is down to 14%.  This is historically very low and below the 100 day risk ratio average of 42% producing an SRBI of 0.33.  An SRBI below 1 indicates risk has been on the decline.

Visit the SmartStops Market Risk Barometer

When we review 2012 and compare the SmartStops Risk Ratio for the S&P 500 to its performance, we clearly see the inverse relationship between risk and performance.  The current low risk ratio of just 14% indicates it may be a good time to buy.

Published previously in the SmartStops Members Year End Letter.

As always, market and equity performance are influenced by many factors and their direction can change on a dime.  We should all invest accordingly.

To learn more about sidestepping periods of elevated risk and improving returns per day in the market, Visit www.smartstops.net.

Originally published at Seeking Alpha: http://seekingalpha.com/article/815851-nowhere-to-run-the-correlation-bubble

Fundamental analysis of “buy and hold” companies is a quaint, Warren Buffetish notion that probably works in the long term. But as Keynes said, in the long term we’re all dead. The big risk in today’s über-correlated markets is systemic shock. One can practice due diligence on a company and buy at a reasonable valuation, but if global markets collapse the next day and don’t recover for years, one has paid a lot in opportunity cost. In other words, tail risk is not reflected in fundamental analysis.

Fundamental analysis is valuable so long as the basic fabric of capital markets remains intact. In an insane world (where U.S. Treasuries and German Bunds are considered “risk-free”, of infinite rehypothecation, where MF Global’s John Corzine walks off with $200M segregated assets, of the London Whale, LIBOR, Goldman’s muppets, regulatory capture of SEC and Fed, U.S. / China animosity and the dollar’s loss of world reserve status) it’s unlikely that business-as-usual will continue without a disruptive bout of creative destruction.

Precisely when and how it will occur is anyone’s guess, but, unfortunately, old school techniques like cross-asset class and regional diversification have lost their glimmer. Just as socioeconomic disparity is partitioning the globe into lords and serfs, so too has the market been divided into polarized castes of highly correlated risk-on assets and (scarce few) risk-off havens.

The common investor generally doesn’t spend much time thinking about how many shares to buy or how significant of a position to take.  Instead, most investors use a common methodology of trading the same number of shares each time, which usually translates to a specific dollar amount.  Other, more sophisticated investors, opt to allocate a certain percentage of their portfolio value to a specific position. Following this train of thought, a new position in a portfolio of $100,000 would transcribe either a $10,000, or 10%, investment or a usual position of 50 shares.

Although these methods may work for some, using the volatility of a specific portfolio is likely to be the most effective decision tool.  Measuring a portfolio’s overall volatility enables an investor to decide on what percentage of that portfolio he is willing to risk losing on the new position.  This methodology is better explained through the following example.

An investor has a portfolio worth $100,000 and would like to minimize any possible losses to less than 1%.  The same investor wants to buy shares of Equity A, which has a current bid of $25/share.  In this scenario, many investors would logically state that with risk limited to 1%, 40 shares of the equity can be bought (40 x $25 = $1,000), however, this is incorrect.

The correct procedure is to first identify the price point at which the investor would sell Equity A, if it were to spiral into a downturn.  For this example, assume that this price point is $21/share.  With this in mind, the portfolio’s risk per share is $4 and total risk limit is $1,000 (1% x 100,000 = $1,000), which means that 250 shares of Equity A can be purchased while limiting risk to $1,000.

The upside in this scenario is that if Equity A witnessed appreciation, the total dollar amount added to the investor’s portfolio would be far more significant on 250 shares than on 40 shares, and the total dollar amount at risk remains at $1,000.

The math behind this methodology is relatively simple; however, the difficult part is identifying a price point at which the desired equity could drop in value.  www.SmartStops.net, ameliorates this predicament by providing effective, easy-to-implement risk monitoring which identifies price points at which upward trends in stocks and ETFs could potentially come to an end.   Rather than guessing at what analytics to use in identifying the true “risk” , SmartStops provides its Position Sizing calculator now on its website so that one can properly allocate to the position based on its individual risk factors.  A much needed tool as relying on just modern portfolio theory’s diversification and allocation principles is not enough for our 21st century markets.  For more information, see http://smartstops.net/PublicPages/PositionSizingCalculator.aspx .

Without question the most popular model to predict market crashes is the VIX, commonly referred to as the “Fear Gauge,” a market index that measures the implied volatility of the S&P 500 index options. Its concept is quite simple, when the uncertainty and fear among investors rises, they commonly run to the S&P 500 options to either hedge or speculate. The increased interest in the options usually leads to higher premiums and as the premiums increase so does the VIX. However, predicting the future isn’t 100% accurate, most of the time it’s not even close. Every forecasting model has its flaws and the VIX is not an exception. There are many problems skeptics have found with the VIX such as; its population study is limited to only the 500 stocks of the S&P 500 and” {the} model is similar to that of plain-vanilla measures, such as simple past volatility” (Wikipedia). A blog post on sensibleinvestments.com summarized the VIX as “simply an indicator of actual volatility in the market but one that is very sensitive to changes in actual volatility particularly if it is on the downside.” Is there a better way?

An elementary statistics theory states that the larger the population size, the greater the likelihood that the sample will be represented. If markets are graded by the performance of popular indexes such as the S&P 500, why limit a forecasting model’s population to only 500 stocks? The economy has become global; interactions from every corner of the world’s businesses affect every other business. If there is a model that forecasts market direction, should it limit itself to just the largest companies? As for only using a month or two of short term option premiums to garner a prediction, as the VIX does, it seems to limit itself to only a single variable. Instead of short term options premiums and limited samples what if we could measure real-time individual stock trend alerts on thousands of domestic and foreign stocks and ETFs? Or simply what if we analyzed the micro components (every stock) to develop a macro forecast of the market based off trends and risk?

By studying the history of risk alerts from SmartStops.net, an intelligent risk management service, two proven alternatives to the VIX were found. SmartStops.net has developed their own proprietary risk model that monitors the trends and risks to over 4,000 of the most popular stocks and ETFs. If the risks grow on any individual investment SmartStops.net alert their subscribers with both long and short term exit triggers. However not only do these alerts help individual and institutional investors manage specific investment risk, the reviews of the alerts themselves have predictive capabilities. By back-testing every alert that SmartStops.net has issued from their inception versus the S&P 500 performance, there is proof of this and the results speak for themselves.

There have only been 7 days for which the amount of Long-Term Exit Triggers (stop alerts) as a percentage of every stock and ETF covered by SmartStops.net has been over 20%. The subsequent market action of the S&P 500 has averaged a negative return for the time periods of 1 week, 1 month, 3 months, 6 months and a year. The 6 month average return is over -7% and when examined from the absolute lows of the S&P 500, the returns average over -19%. If you remove the knee-jerk market reactions caused by “Flash Crash” on 5-6-2010, the returns are even lower.
Another metric offered by SmartStops.net is their SRBI(tm) (SmartStops Risk Barometer Index); this index measures the current percentage of stocks and ETFs that are in “Above Normal Risk” state (ANR) divided by the 100 day average above normal risk percent. By definition, a stock that is listed ANR experienced a risk alert as its last SmartStop alert identifying a downtrend. Conversely, a stock that is listed in a “Normal Risk State” experienced a reentry alert as its last SmartStop alert indicating trading strength and an upward trend. Back-testing historical SRBI data since inception shows that the repercussions to the market when the percentage of downtrends increases to over 40% of all stocks and ETFs covered are profound. Below you will see that there have been only five occasions where this has happened. In each case the S&P returns for the following year were all negative.

Is this a better way?

Before a concrete conclusion can be determined, the predictive capabilities of the VIX must also be analyzed. For this study the data utilized the same time frames as SmartStops’ data and reviewed two commonly watched scenarios that represent fear among VIX watchers. The first, when the VIX climbs above 40 and the second, the highest closes of the VIX. The results versus the S&P 500 are below.

The VIX does have some predictive properties. The returns from one week up to six months following the move over 40 shows on average negative returns. However, these returns are on average are smaller than the returns using either of SmartStops’ models. Even more compelling, when viewed from the pinnacle of fear (while the VIX peaks), it is only accurate on a 3 month outlook. This proves that not only the VIX is inaccurate predicting longer term moves, but is actually a quality contra indicator for one year returns.

Again, is this a better method of gauging a coming market crash?

It’s hard to argue with the data. Every time the LT exit triggers are over 20% of all stocks and ETFs covered for any given day, the market has fallen. Through the review of the SRBI’s data we see that when the percent in the above normal risk state rises to over 40%, the market has also fallen. The performance statistics are even lower if you take into consideration that among the four thousand plus stocks and ETFs covered by SmartStops, some are inverse ETFs. Comparing this data, the results are not only surprisingly accurate, but have confirmed that both of SmartStop’s market- predicting models work together to predict market crashes.

Compelling losses

Not only is the data hard to argue with but the losses that followed these alerts could be difficult to manage. The average loss for six months is over 15% and over 14% over a full year, but more importantly if we look at the lowest value intra-day price these losses could have amounted to over 35%! These are simply staggering numbers. Imagine the losses if you were heavily margined? Imagine the opportunity costs? Any investor should always be aware of the overall market and these two models can help predict it.

What does the model say about the near future?

In early August 2011 the model gave an unprecedented three alert triggers for both LT triggers of 20% and the SRBI downtrends of 40%. This is the first recorded three alert trigger within five days (8/4/2011, 8/5/2011, 8/8/2011). On 9/22/2011 the intra-day low of the S&P 500 was 1114.22, a 7.15% drop within only a month and a half! On this same day (9/22/2011) two new alerts were triggered. The forecast model has proven its accuracy time and again. Assuming we avoid another “Flash Crash” event, the models expects the market to continue its fall to an average of 15% by February 2012 and 14% by August 2012. Keep in mind, the intra-day lows of the markets could be substantially lower.

This is why Risk Management and Protection are a must in every investor and trader’s arsenal.   SmartStops triggered its short-term protection for Netflix at $74.13 at 9:32AM.  NFLX closes at $60.28 today, 7/25/12.

In the most recent Netflix downtrend SmartStops saved its clients  $42.46 per share!  

See chart at: http://www.smartstops.net/PublicPages/SmartStopsOnDemand.aspx?symbol=NFLX

The SmartStops BrokerLink service makes it easier for investors to monitor the risk states of equities held in their brokerage accounts, as well as facilitate the placement and management of protective stop loss orders.  Using the TradeKing Applications Programming Interface (API), SmartStops.net has made BrokerLink available for TradeKing clients. Now, with a click of the mouse, TradeKing clients can synchronize their SmartStops.net portfolio with their TradeKing brokerage account positions.  The SmartStops BrokerLink service also provides a simple protective order management screen that makes it easy to update multiple protective orders at the client’s brokerage account at one time.

“At SmartStops, our goal is to help investors of all levels recognize when their risk exposure changes and facilitate timely action with the aim of protecting assets and improving returns,” said Chris Conway, Director of Product Management, SmartStops.  “TradeKing’s open, advanced API made it possible for us to offer the SmartStops BrokerLink service to their client base of active, self-directed investors.”

Kevin Delo, Senior Vice President of Product Management at TradeKing noted, “In today’s volatile market, it is more important than ever to manage risk exposure.  We are pleased to be working with SmartStops to bring this innovative approach of risk management to our clients.”

TradeKing clients who wish to take advantage of the SmartStops service to monitor their portfolios for changes in risk exposure can create a SmartStops account by visiting the SmartStops.net TradeKing Special Offer Page.

About SmartStops.net

SmartStops.net (www.smartstops.net) provides a simple to use solution helping investors of all levels manage investment risk. SmartStop risk alert prices are calculated and published each market day for stocks and ETFs. If your equity falls and triggers its SmartStop, consider taking protective action.  It’s that easy.  For more information visit www.smartstops.net or email SmartStops at info@SmartStops.net.

About TradeKing

TradeKing (http://www.tradeking.com) is a nationally licensed online stock and options broker offering simple, low cost online trading fees ($4.95 per trade plus $.65 per option contract).² A pioneer in integrating new financial social media as part of its innovative online equities, options trading and fixed-income trading platform, TradeKing has received multiple discount broker awards from top industry sources and was rated best in customer service by SmartMoney² Magazine, ahead of OptionsXpress, Scottrade, Fidelity, and TD Ameritrade. (June 2012 SmartMoney Broker Survey).

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SmartStops comment:   The fear of investing in traditional assets due to volatility can be minimized for an advisor’s clients by the use of a SmartStops methodology.  SmartStops was created because of the need for a more Modern Portfolio approach that could better manage traditional assets.      

 How Can Advisors Build a More Modern Portfolio?

Following a pair of bear markets, advisors know the days of buy-and-hold investors with 60/40 portfolio allocations are over.

From the mass affluent to the ultra-wealthy, investors want more than just equities and fixed income in their portfolios. Clients expect their advisors to bring innovative alternative investments to the table.

“A lot of investors and advisors have moved their assets to cash or into lower yielding asset classes,” said David L. Giunta, the president and chief executive officer of Natixis Global Asset Management’s U.S. distribution. “To get them off the sidelines, advisors can’t just bring these clients back to traditional approaches. There is just too much volatility.”

According to the 2012 Natixis Global Asset Management U.S. Advisor survey, the global financial crisis and uncertain market recovery has accelerated interest in alternative investing. According to the survey, 49% of advisors are uncertain that the traditional 60/40 allocation between stocks and bonds is still relevant, and 23% said the traditional approach isn’t close to meeting the needs of investors in contemporary markets.

But if a 60/40 allocation is no longer relevant, what is the right mix?

Dick Pfister, an executive vice president and managing director of global sales and consulting at Altegris Investments, A La Jolla, Calif., based provider of alternative investments, said modern portfolio theory has shifted dramatically in the past decade. He said that large institutional investors and endowments have “dramatically” increased their allocation to alternative investments.

According to a national study of endowments by the National Association of College and University Business Owners, the average endowment had 52% of its portfolio investments in alternative assets in 2010, up from 24% in 2002.

Pfister said he doesn’t expect advisors to shift their portfolios that dramatically, but anywhere from 10% to 35% of an individual investor’s portfolio should be held in alternatives.

“We are seeing a lot more on the upper end of that range,” he said. “With more mutual funds trading like hedge funds, more people are allocating to the alternative space.”

Giunta said clients are getting more comfortable with alternative investing because more alternative options are available within the comfortable and familiar confines of a mutual fund, but he says the right portfolio allocation varies on a client-by-client basis.

“We have to create portfolios based on each risk and volatility scenario,” he said. “Advisors need to talk to their clients and understand how much of a dip they can stand. Advisors need to be having those conversations and educating their clients about a variety of alternative options.”

Tim Clift, the chief investment strategist for Envestnet, a Chicago-based provider of technology-enabled wealth management products and services for advisors, said he thinks the average portfolio should allocate 20% to 25% to alternative investments. “Investors need to be putting a meaningful amount into alternatives,” he said. “Five percent to 10% is not meaningful enough to provide advisors and investors the proper downside protection.”

Robert Worthington, the president of Hatteras Funds, agreed that a 5% allocation was far too small. He said he worked with one advisory firm’s allocation committee that recommended 7% to 10% be put into alternatives and he told them, “if you don’t do 20% its not worth it.”

Hatteras, a Raleigh, N.C., based asset manager that provides alternative investment solutions for advisors and their clients, recommends 20% to 25% of a client’s portfolio be allocated to alternatives, Worthington said.

“More leading edge advisory firms are shifting 30% of their portfolio to alternatives,” he said. “I think others [advisors] are going to follow. With the advent of liquid alternative funds, advisors can increase allocation to alternatives without reducing liquidity. Access to alternatives to greater and easier today than it was four years ago and that means allocating to alternatives is becoming more mainstream.”

Missing Best and Worst Days in Stock Market 1984-1998

 The article was originally published in 2008.    

SmartStops  comment  on 08/4/11:    Markets have dropped 9% in last nine days with the whole debt ceiling “show” going on in U.S.  government.   Do you think you needed to have given back your gains?   Think again!

Market timing is the art of making investment decisions using indicators and strategies to observe and determine the direction of prices. Many believe that market timing involves predicting the future, when in reality, the goal of market timing is to participate in periods of price strength and avoid periods of price weakness.

The general investing public has been told that market timing is a high risk proposition. Most of what has been written about the topic focuses on its failure and the risk investors take when trying to time the market. A typical study focuses only on the negative consequences of missing a few particular up days in the market – calculating the negative financial impact of missing those days and concluding that attempting to time the market is foolish. The biggest fallacy with these studies is    in the assumption that attempting to time the market will invariably result in missing some important up days. Why should that assumption be made? Where is their study that supports such an assumption?
Then there is the problem of the missing data. That missing data is the data from the study that clearly shows that the benefits of skipping a few of the worst days more than makes up for the potential drop in performance from missing a similar number of up days. This critical distinction is generally not investigated or is deliberately ignored. Unfortunately these studies misinform the public and encourage investors to neglect their
investments in anticipation of riding those big up days, resulting in the acceptance of substantially more risk than necessary. Let me show you the data from one of the major studies used to frighten investors about market timing. This is only one of many studies that purport to show the hazards of attempting to protect your capital. It’s commonly referred to as the “Black Swan” study because it deals with unusual market events (Black Swans and Market Timing: How Not To Generate Alpha, by Javier Estrada, International Graduate School of Management, Barcelona, Spain).

The period in this study encompasses more than 100 years of daily data on the Dow Jones Industrial Average from December 31, 1899 through December 31, 2006. In total the study examines 29,190 trading days. A $100 investment at the beginning of 1900 turned
into $25,746 by the end 2006, and delivered a mean annual compound return of 5.3%. Here are the most widely publicized parts of the study you are most likely to have seen:
1) Missing the best 10 days reduced the terminal wealth by 65% to $9,008, and the mean annual compound return one percentage point to 4.3%.
2) Missing the best 20 days reduced the terminal wealth by 83.2% to $4,313, and the mean annual compound return to 3.6%.
3) Missing the best 100 days reduced the terminal wealth by 99.7% to just $83 ($17 less than the initial capital invested), and reduced the mean annual compound return to −0.2%.

Wow, we wouldn’t want to miss those best days would we? Better ignore market timing and just ride through the declines.

Now here are the parts of the study you may never see because the folks publishing the data don’t want you to know how helpful market timing can be:
1) Avoiding the worst 10 days increased the terminal wealth by 206% to $78,781, and the mean annual compound return by more than one percentage point to 6.4%. (Benefit of avoiding ten worst days is $53,035 more profit vs. risk that missing ten best days might reduce results by $16,738.)
2) Avoiding the worst 20 days increased the wealth by 531.5% to $162,588, and the mean annual compound return to 7.2%. (Benefit of avoiding 20 worst days is $136,842 more profit vs. risk that missing 20 best days might reduce results by $21,433.)
3) Avoiding the worst 100 days increased the wealth by a staggering 43,396.8% to $11,198,734, (Yes, that’s $11 million!) and more than doubled the mean annual compound return to 11.5%. (Benefit of avoiding 100 worst days is $11,172,988 more profit vs. risk that missing 20 best days might reduce results by $25,633.)

Guess what – I like those odds.  But there is absolutely no evidence that market timing will cause us to miss any of those best days. That is an entirely unsupported conjecture. It is very possible to capture many of the good days and avoid many of the bad days with market timing that is less than perfect. Think about this possibility the next time you encounter one of these unfairly biased studies that attempts to show the risks of market timing. Here is some basic advice about market timing that will definitely help. You don’t need to be an expert to be a successful market timer.
1) Keep it simple. Simple market timing strategies work as well or even better than complex strategies, mainly because they have fewer assumptions. By keeping it simple, one doesn’t need to know the ins and outs of Fibonacci retracement levels, Parabolic Stop and Reverse calculations or how to count the Elliott waves.
2) Believe in the importance of trends and the assumption that whatever the current trend direction might be, it is likely to continue. If your market timing efforts are based on simply defining and then staying on the right side of the current trend then you won’t get caught up in trying to forecast tops and bottoms.
3) Know your critical time period for defining trends. If you are concerned about results over a period of years you don’t need to worry about tomorrow or the day after or worry about what happens over the next ten minutes. Give some careful thought to the time period that might have the most impact on your investments, and then learn how to define that trend. What happens over a period of months is
significant even to those long term investors that might be concerned about trends of years or more.
4) Concentrate on your exit timing. Investors in general tend to spend too much of their effort on figuring out what stocks to buy and when to buy them. They leave their exits to chance or just sell when they need to raise cash. They forget that it is the exit and not the entry that determines the outcome of an investment. Let me repeat that statement: “It is the exit and not the entry that determines the outcome
of an investment.” Please don’t forget that! Remember that Black Swan study we referenced?   If we want those big profits we have to know when to sell to avoid those big declines.
5) Don’t expect perfection. Even the world’s most successful investors make mistakes but these successful investors are quick to take their losses and move on.  Successful investors are also willing to sell a stock to reduce risk and then willing to buy it back even higher if the trend resumes. Don’t expect or attempt to buy at bottoms and sell at tops. Take it easy and just do your best to capture the easy parts of the obvious trends.
6) Do some homework. If you are looking for some suggested reading I would recommend Gerald Loeb’s classic book, The Battle for Investment Survival and Dr. Van Tharp’s more recent book, Trade Your Way to Financial Freedom. Of course, when it comes to exits I have to put in my plug for www.SmartStops.net.  It really is the best exit service bar none.
7) Always limit your risk and know how to calculate exactly how many shares to buy for each investment you make. A detailed webinar on this topic can be found on this blog in right hand column.   Controlling risk is a simple two-step process that this webinar will explain.

Believe it or not, you are now well on your way to being a successful investor and market timer. Good luck and remember to keep it simple!

Managing Risk With A Diversification Strategy
Managing portfolio risk through diversification is usually achieved by investing in a variety of equities that are negatively correlated such as large cap stocks, commodities, emerging markets and global equities. Recently though, it’s becoming more difficult to achieve this type of diversification as correlations aren’t constant and many global markets are becoming more similar to U.S. markets.

Reviewing sector risk is a good way to manage risk when using a diversification strategy. Investors can allocate funds to equities in leading sectors which are experiencing lower risk within the overall economic environment. There are many tools available for measuring sector risk including a free tool called the SmartStops Risk Ratio (SRR)™, useful in identifying the magnitude of risk by sector. For example as of March 26th, 2012, the healthcare sector on SmartStops Risk Ratio (SRR) is showing a 30% risk factor meaning 30% of equities in this sector are in an above normal risk state. If we further research using this tool, we find that the telecommunications sector has a 64% risk factor, meaning 64% of equities in this sector are experiencing above normal risk. In this scenario, an investor could rotate out of the telecommunication sector and focus on the healthcare sector, selecting individual healthcare stocks that are currently in the normal risk state.

Many investors choose individual stocks with either a growth or value objective in mind. Growth stocks are corporate stories with rising sales and profits and usually dominate their marketplace. For example, if you buy a stock for its growth potential, review the risk possibilities through data and risk charts. Data might include new information regarding large expenses allocated to expansion, often called “return on invested capital”. Return on invested capital measures whether companies can find profitable projects to inject future growth. A value objective focuses on underpriced bargains which investors expect will return to a “normal” state. A risk chart with re-entry trigger points provides valuable information for knowing when to buy an underpriced bargain.

And don’t forget the number of stocks that you should be holding in your portfolio to assist with risk reduction. In today’s markets, it takes even more positions to achieve a lower risk based on diversification alone. According to Rodney Sullivan, editor of The Financial Analysts Journal, “as recent as 1997, whereas it used to take 20 stocks to eliminate most of the likelihood of enduring more risk than the market as a whole, today, it takes 40 stocks to diversify.”

Managing Risk With a Buy and Hold Strategy
Investors have been taught for years that a buy and hold strategy for portfolio management is guaranteed to outpace the market when comparing rates of return. However, the amount of risk a stock is experiencing has no relation to time and holding the stock for an extended period of time does not eliminate the risk associated with that particular stock. To best manage for risk, if you’re using a buy and hold strategy, one must know when a specific stock is experiencing unusual risk and be willing to sell. Putting your hard earned money to work in a stock that has a normal risk state will achieve higher returns in the long run. On a risk chart provided by SmartStops, if you were invested in Netflix, Inc (NFLX) prior to 2011 and had sold at any of the 6 alert signals from Dec. 2010 until Jul 26, 2011, ranging in price from $184.92 to $262.85 per share, you would have saved yourself from a significant loss. Today, the share price is still hovering around the $120 range. Within the buy and hold strategy, without managing for risk, you would have just ridden that roller coaster down and then hopefully back up again.

Managing for NFLX risk, you could have exited the ride at the first risk alert, waited for the ride to bottom out, and then repurchased at the reentry price (triggered at $81.00 on Jan 5, 2012), thereby increasing protection on your NFLX capital and significantly increasing your returns.

Managing Risk With a Stop Loss Strategy
Managing an investment portfolio using a stop loss strategy is effective. The difficulty lies in correctly identifying the optimum exit points. Choose an exit too close and you could be exiting prematurely and an exit choice too far away gives up significant gains before your protective exit triggers. Optimized exits should be tailored to each individual equity, taking into account its daily volatility and current trading pattern. SmartStops publishes updated optimized exits each market day and through its BrokerLink service, maintains stop loss orders with broker partners such as TD Ameritrade and TradeKing. Using an automated risk assessment decision tool that intelligently adjusts each day for the optimal exit and re-entry points manages risk effectively and more profitably.

Managing Risk With Loss Aversion Behavior Strategy
Managing a portfolio using loss aversion behavior is not a very effective strategy but one that many investors utilize. When purchasing a stock, we often become not only financially invested in the equity but also psychologically invested. As a result, we view the act of selling this equity as an admission of guilt of a poor decision. Instead, we often look for information to validate our initial buying decision, even in the face of losses and overwhelming evidence to the contrary.

By trying to find information that confirms the buying decision, investors discount other meaningful information and often hold the loser position hoping for a rebound. Investors could eliminate the loss aversion behavior by taking the emotion out of the investment and relying on analytical tools for direction. SmartStops is one of the few companies offering an automated risk assessment decision tool that notifies investors when a stock is experiencing unusual risk. With the information gained in the risk alert, the investor can then do further research and make a rational, timely decision based on facts and not on emotion.

Whichever investment strategy you choose to use, further manage the risk within your portfolio. Don’t get taken for a ride.