Muscular Investing

March 2019

Muscular Investing

Diversification Can Actually Make Your Portfolio Rise During Crashes

by Brian Livingston

Using multiple types of assets in a portfolio isn’t just a theory. It works in the real world to cut your losses and increase your gains. • Only in the past few years have all of the major global asset classes achieved representation by low-cost exchange-traded funds. This presents a way for individual investors to diversify their portfolios for greater profits such as never before. Figure 1. Want to use the magic of diversification? It works better with a greater number of assets to choose from. Today’s new, low-cost ETFs are just what we need. Photo by Maya Read More 

Muscular Investing

What Asset Can You Add to Stocks for the Greatest Gain?

by Brian Livingston

Diversification works well in sample cases, but how about in actual trading? In this article, we’ll combine two assets you can actually buy and sell. • When you add to an all-stock portfolio an asset that has a low or negative correlation to stocks, the result is a more diversified portfolio that can subject you to smaller losses with the possibility of larger returns. Figure 1. Diversifying a portfolio in even the simplest way, with only two assets, produces some great benefits that may not seem obvious. Photo by Vi Chizh/Shutterstock. • Part 3 of a Read More 

Muscular Investing

Given Two Lemons, You Can Make a Profitable Lemonade Stand

by Brian Livingston

Diversification works in mysterious ways. But does that mean diversifying a portfolio is a hard thing to do? No! It’s actually quite simple. • The problem is that it’s not obvious exactly HOW diversification improves a portfolio’s return. It’s not rocket science. It’s simple math. But many people have never learned the ways diversification can turn a pig’s ear into a profitable silk purse. • Part 2 of a series. Part 1 appeared on Mar. 19, 2019. • As we saw in Part 1, the human mind is not ideally suited to guess the best asset allocation for a portfolio. That’s true Read More 

Muscular Investing

Why Use Diversification? To Make More Profit.

by Brian Livingston

We often hear that we should diversify, diversify. Why should we do so? For greater gains. But the way to do this is seldom laid out clearly. • The secrets of diversification are not obvious. The truth is that it’s possible to earn MORE MONEY from a properly managed, diversified account than the simple average of the different asset classes that are used in the account. • More than 100 million households in the US, Canada, and other countries hold 401(k), IRA, and similar savings accounts. The vast majority of 401(k) participants cannot buy individual stocks — only index funds — and can Read More 

Muscular Investing

Why Is It So Hard to Find Indicators That Always Work?

by Brian Livingston

It’s often assumed that stock markets follow a ‘normal distribution’ — a bell curve — but there’s nothing normal about the way stocks behave. • In any securities exchange, where the sum of the greed and fear of all traders’ opinions determines the prices, there are a few big winners and many big losers in what’s known as the ‘free-market distribution.’ Figure 1. Indicators work until they don’t. Photo by Standret/Shutterstock. • Part 4 of a series. Parts 1, 2, and 3 appeared on Mar. 5, 7, and 12, 2019. • We saw at Read More 

Muscular Investing

After Almost 40,000 Backtests, One Strategy Stands Out

by Brian Livingston

In a monumental achievement, backtests of 39,832 trading rules by researchers at Columbia University and Academia Sinica resulted in a big discovery. • None of the gains were statistically significant in ‘mature’ markets such as the Dow Jones Industrial Average and the S&P 500. But further mathematical analysis revealed a winner. Figure 1. Many are tested, but few are chosen. Illustration by MicroOne/Shutterstock. • Part 3 of a series. Parts 1 and 2 appeared on Mar. 5 and 7, 2019. • As we saw in the previous part, the author of Read More 

Muscular Investing

How Do You Know Your Strategy Will Work in the Future?

by Brian Livingston

When you find an investment strategy that has worked in the past, how do you know it will work in the future? We may just be overconfident. • Traders tend to select strategies that have had a ‘hot streak’ recently, but those formulas may have a ‘cold streak’ for the next few years. Simple strategies are likely to perform better over the long run than complex strategies that are ‘curve fit.’ Figure 1. When we backtest hundreds of strategies, some will show great returns and others poor returns — with most in the middle — completely at random, resulting in Read More 

Muscular Investing

What You See in the Market Is Not Always What You Get

by Brian Livingston

We can look and look at data and wind up perfectly comfortable with our observations. But how can we be sure we really understand what we’re seeing? • The human mind has its own way of presenting the external world to us, just when we think we have everything figured out. Compensating for the conclusions we jump to is essential for our investing success. • More than 100 million households in the US, Canada, and other countries hold 401(k), IRA, and similar savings accounts. The vast majority of 401(k) participants cannot buy individual stocks — only index funds — and can make no more Read More