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AVC Investment Strategies

The key to a successful investment strategies involve three main elelments:

  • What to invest in (Instrument)
  • When to buy and sell (Market Timing)
  • How much to invest (Risk Management)

We will look at each of these elements individually as we focus on creating successful invetsment strategies.

Instruments

In order for an investment to be successful, it should have low costs of entry and exit, have very good liquidity, and accessible to large sums of money. Low priced stocks, individual bonds, real estate and most alternative investments do not lend themselves well to investment. Main large company and stock indexes do.

A simple way to evaluate liquidity is to use start with stocks and ETFs that trade over $20 and have 100,000 average daily volume. More stringent guidelines could include only stocks and ETFs with options available that trade at ‘penny increments’, meaning the bid/ask spread on the option can be traded by adjusting only 1 cent. Using all these criteria your entire investment universe is reduced to only about 176 stocks and 52 ETFs with the following sector and style break downs.

Market Timing

Once a list of instruments is identified, a timing component needs to be added to find out when to buy and sell. There are two main aspects of this step.

First, the entire stock market should be in an uptrend as falling markets tend to be broad based sell offs effecting every stock. General market trends can be easily accessed on the Big Picture section of investors.com or using more sophisticated analytics such as those published by Larry McMillan’s Option Strategist. Both of those sources noted the latest market uptrend started around Aril 6, 2020. Staying abreast of the current investment climate is half the battle.

The other half of the battle is finding which stocks and ETFs are performing well from the overall 228 stock and ETF universe. This is more difficult as a ranking system needs to be in place. Zacks’ premium service can identify names with highest ratings. For instance, a recent ranking would show these are the best stocks and ETFs to own now based on Zack’s criteria.

AVC Advisory has access to more sophisticated services designed specifically for financial advisors. A current ranking from this proprietary system would lead to the following results.

A monthly or quarterly rebalancing of the portfolio is usually necessary to keep the strongest stocks and ETF in the porfolio while weeding out the weakening names.

An equal weighted portfolio of the 25 names above has more than tripled the S&P 500 (SPX) return since the market returned to an uptrend on April 6th, 2020.

Risk Management

Portfolios should be diversified in order to reduce single stock risk. For instance, in the portfolio above Royal Carribean (RCL) and Groupon (GRPN) are still posting extremely negative returns for the year, down 48% and 32% respectively. Allocating to between 20-30 individual names reduces risk as only 3.5 – 5% should be allocated to any stock.

Also, rebalancing the portfolio monthly or quarterly and trimming losing stocks helps keep loses to a mininum.

Following a rules based system, as above, will generate better risk management practices too.

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