Position Sizing: Key to Maximizing Returns

In a time when market volatility and equity preservation is of utmost importance, determining the correct number of shares to buy, or “position sizing”, is key to maximizing returns and minimizing risk.

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.

VIX, Fear and maintaining Intelligent Protection

NEW:  SmartStops has just released its SmartStops Risk Barometer Indicator (SRBI) .   Click here  to check it out and let us know what you think.

 

SmartStops comment:    Why wait for VIX to go above a 200 day moving average in order to keep yourself protected?    There is a better way with SmartStops.

Are VIX ETFs Breaking Out?          originally published at ETFTrends  

Some traders have been keeping a close eye on the CBOE Volatility Index as a possible “tell” that the rally in risk assets since March 2009 may be due for a breather.

That’s why the VIX’s move above its 200-day moving average Wednesday drew the attention of investors with a technical bent.

The index, which measures the implied volatility of options contracts on the S&P 500, has been relatively subdued during the market’s recent rocky stretch. The benchmark is known as Wall Street’s favorite fear gauge.

However, the VIX was up 18% in the final hour of U.S. trading Wednesday to its highest level since March.

The largest exchange traded product following VIX futures, iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), rose 8%.

In stock ETFs, a Nasdaq-100 fund was pushed below a key indicator in Wednesday’s sell-off. [Nasdaq ETF Lower]

CBOE Volatility Index

VIX

Financial Advisors – Do Something!

from Financial Advisor Magazine:       Financial Advisors – Do Something!

Are you starting to feel a little uneasy about the “stay the course” assurances that worked for so long? Should you be? Is the buy-and-hold, strategic-allocation-with-regular-rebalancing style of managing investments (the one service that you actually got paid to provide) really good for all seasons? Or is MPT and its efficient market hypothesis overly simplistic and maybe even dangerous to your increasingly restless clients and to your business?      More -> http://www.fa-mag.com/component/content/article/4263.html?issue=110&magazineID=1&Itemid=73

MPT in a Black Swan Universe

from Financial Advisor Magazine:       Advisors need to consider how catastrophic events could help portfolios outperform.

More than one year after the collapse of Lehman Brothers and the subsequent meltdown in the financial markets, many long-held investment tenets are now being questioned. The validity and utility of modern portfolio theory as the prescription for prudent portfolio management is being re-examined. Dealing with this issue and developing solutions to cope with the revelation of newly uncovered risk is imperative if we are to successfully guide our clients through this tumult. It is equally imperative for our own survival to meet this challenge directly and develop strategies to navigate the financial minefield.

With two major declines over the past eight years, the stock market is on pace to underperform every decade over the past century, including the 1930s. During this time, modern portfolio theory represented the investment methodology most widely employed by advisors. It mandated a strategy of allocating funds to a wide array of asset classes in an effort to lower risk. The Holy Grail was to identify lowly correlated or even negatively correlated assets that would allow a portfolio to withstand the most severe declines.                    More -> http://www.famag.com/component/content/article/4615.html?issue=115&magazineID=1&Itemid=73

Asset Allocation is Dead

Traditional asset allocation is dead.   Advisors that adapt to this new climate will survive–those that don’t will go the way of the dinosaur.

http://www.financialadvisormagazine.com/online-extras/4610-asset-allocation-is-dead.html