Rotating between Sectors- Profiting Intelligently from Multiple Bull Markets
Ok, so Gold is in a Bull Market. You can sit with your Gold stocks and watch your money grow, or you can take it one step further, and maximize the returns on your money: By rotating your funds between different sectors, you can profit from temporary inefficiencies in the equity markets.
Let's say you are bullish on Gold, REITs, Utilities and Oil. News comes out which says that interest rates are going to shoot up like crazy, or the US housing market is going to collapse, and the REITs sell-off. Thanks to Index funds, you can put some money to work in the REITs very fast and cheap-go and buy some IYR stock (IYR is the Real Estate ETF). You can sell some of your Gold stocks, and get into the REITs for a short term swing trade. Wall street has been doing this all the time, but only now with the launch of Index Funds and Cheap Online Trading, the individual investor has the ability to do this. Now that is efficiency.
An additional advantage of this strategy of "buying the dips" in bullish sectors is that you are always diversifying-reducing the risk of your overall portfolio. Even if the "dip" is not short term and persists, you have reduced your overall risk.
Of course, you rotate into uptrending, bull markets. You sell the rallies, and buy the dips, constantly putting your money to work in different sectors. In theory you could do that within a sector, buying and selling various individual companies (see the 52 wk high of a company and buy one which has pulled back from its 52 week high), but it is a lot more risky-because individual companies can have company specific issues which you may not be aware of--dishonest management, bad decisions by them, etc. When you are rotating your money between bullish sectors, you are always reducing the risk of your portfolio (even if you are wrong!), and if you are right, making much more than a standard buy and hold in a particular sector.
The downside is the short term capital gains taxes, Uncle Sam wants a cut of your smart trading moves. But that's fine--I don't mind sharing money with the Big Daddy if things are going dandy for me.
Let's say you are bullish on Gold, REITs, Utilities and Oil. News comes out which says that interest rates are going to shoot up like crazy, or the US housing market is going to collapse, and the REITs sell-off. Thanks to Index funds, you can put some money to work in the REITs very fast and cheap-go and buy some IYR stock (IYR is the Real Estate ETF). You can sell some of your Gold stocks, and get into the REITs for a short term swing trade. Wall street has been doing this all the time, but only now with the launch of Index Funds and Cheap Online Trading, the individual investor has the ability to do this. Now that is efficiency.
An additional advantage of this strategy of "buying the dips" in bullish sectors is that you are always diversifying-reducing the risk of your overall portfolio. Even if the "dip" is not short term and persists, you have reduced your overall risk.
Of course, you rotate into uptrending, bull markets. You sell the rallies, and buy the dips, constantly putting your money to work in different sectors. In theory you could do that within a sector, buying and selling various individual companies (see the 52 wk high of a company and buy one which has pulled back from its 52 week high), but it is a lot more risky-because individual companies can have company specific issues which you may not be aware of--dishonest management, bad decisions by them, etc. When you are rotating your money between bullish sectors, you are always reducing the risk of your portfolio (even if you are wrong!), and if you are right, making much more than a standard buy and hold in a particular sector.
The downside is the short term capital gains taxes, Uncle Sam wants a cut of your smart trading moves. But that's fine--I don't mind sharing money with the Big Daddy if things are going dandy for me.
Subscribe now to The Wall Street Journal and get up to 8 weeks FREE
The Prudent Speculator -- Ranked #1 by Hulbert for 10, 15 and 20 year performance...Click Here!
If you subscribe to the Wall Street Journal or the Prudent Speculator(a Forbes.com publication) using the links above, I get a commission.
0 Comments:
Post a Comment
Links to this post:
Create a Link
<< Home