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Last Update Fri Oct-20-17 at 6:42 pm


Index Portfolio Strategy

Optimal stock market allocation to maximize returns

The two prime questions when it comes to the stock market are whether to be in it, and if so, how much? The answer to the first is to follow the trend using our proven AlphaKing Trading indicator to provide the buy and sell advisories, as there is no better indicator at making money in the stock market over the long term, working equally well in bull and bear markets.

And we now have the answer to the second question - once in, how much in is best? - after completing backtesting of many decades of data to find the smoothest route to maximum performance.

Real time results of our original trend following system have been solid, impressive, delivering significant outperformance in line with expectations as outlined by our rigorous testing, with 2008 our breakout year as it showed just how badly flawed everyone else’s investment strategy was.

Unfortunately 2008 also showed that one had little choice in avoiding the volatile swings seen at every change in trend, especially if trying to juice performance by using leveraged ETFs, which doubles both the return and the volatility.

Our new optimal allocation Index strategy was designed to help smooth some of the larger ups and downs, using a -200% through +200% exposure model based on risk versus reward, aiming to increase exposure on dips against the trend, while reducing exposure on spikes in-line with the trend. This not only reduces volatility, but also makes maximum use of leveraged ETFs, which are prone to slippage losses overtime, and often fails to deliver 2:1 performance while often showing more than 2:1 volatility.

Our new system makes leveraged ETFs volatility work with the investor, rather than against the investor, making them a viable trading vehicle over intermediate and longer time frames.

There were 8.4 total changes of positions on average each year (2.1 new bull trends, 2.1 new bear trends, with 4.2 adjustments made within those trends.) The Hit Rate was 43.4%, with an average profit of 12.3%, versus an average loss of 3.3%, which includes all the adjustments. Double digit wins versus losses were 56 to 10, which is where the big money was made.

If you look at full trend change cycles - where you view all trades made within the trend as one trade - the Hit Rate falls modestly to 37%, while the average profit doubles to 25.6%, while at the same time the average loss declined a tad to 3.2%. Better yet, double digit losses fall to only 4 times from 1973 to 2009, versus 33 times where double digit wins of 40.1% on average were delivered.

In testing $10,000 became $68 million from 1973 through 2009, with a compounded annual return 27% (31% average annual rate of change.) Results over the past two decades have been even more impressive, 34%-41% average annual rate of change.

In comparison, holding the S&P500 long turned $10,000 into $95,000. (6.3% compounded annual return - excluding dividends.)

That is the great news; now here’s the reality check, as every investment system known to man has its flaws to go along with its good points: returns on an annual basis saw 10 losing years - 9.6% average loss - versus 27 profitable years - average profit of 46%. (Winning and losing years combined = 31% annual rate of change.) The worst losing year saw a loss of 18.7% in 1984. The 1970s saw two back to back losing years (1976 down 4.8% and 1977 down 7.3%.) The 1980s saw no back to back losing years. The 1990s saw two back to back losing years (1993 down 16.% and 1994 down 11.5%.) 2000-2009 saw two back to back losing years (2004 down 8.4% and 2005 down 8.7%.) Please note that these back to back periods were also losing years for our unleveraged Index approach, though the losses were less since no leveraged was used. They were also very tough trading years for buying and holding the S&P500.

While past performance may not be indicative of future returns, I am so encouraged by the strength of these results, as well as a strong understanding of what the alternatives are, that I trade all my money the AK way (2/3 of total assets available for trading in the optimal allocation Index Portfolio - that uses leverage as described above - and 1/3 in the GrQ/25 portfolio.)

Whipsaws and red ink are not fun, though they are very much part of trading, and our research shows that they do little to prevent long term performance, which is our lone mission. Using leverage does increase volatility - even using our optimal allocation method - and such ups and downs are not for everyone. All investors should seriously consider whether or not the reach for additional profits is worth the additional risk and volatility for themselves. Please read the disclaimer and accept its terms below before investing any money.

Please feel tree to Contact Us your questions and comments

Results are tabulated using the opening price the day following a new trading signal, and exclude commissions, dividends, or interest paid on cash balances during sell periods. Stock prices highlighted in blue are temporary - using the end of day quote the day a new buy or sell signal is generated - with the final price adjusted the following trading day when the opening price is available. Past performance is no guarantee of future success

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