Tuesday, April 29, 2008
You don't have to take on a lot of risk to generate consistently high returns. In fact, today I'm going to share with you an extremely low-risk trading strategy that can create large, double-digit gains every year with limited downside volatility.
The strategy incorporates the best of all worlds... immediate income, limited risk, the potential for speculative capital gains, and the capital preservation of long-term value investing. And best of all, it's simple – so simple you probably won't believe how large the returns can be. After all, it's not supposed to be easy to make money in the stock market. But it is.
In fact, it's difficult to lose money with this strategy.
I call it the Split Personality Investment Program, and it works like this...
First, decide how much money you're going to commit to the stock market. Take 90% of that amount and use it to buy low-risk value stocks against which you'll be selling covered calls. A good covered call writing program will generate at least 15%-20% income every year. And if you've concentrated on the low-risk side of the equation, then you shouldn't see much downside at all.
I can't emphasize enough how perfect the current environment is for this strategy. The market offers plenty of low-risk stock plays right now. They may not be ready to move higher right away, but it's hard to imagine much more downside. By selling covered calls, you can eliminate most of that downside risk and create a fabulous income stream.
The goal of Advanced Income, my covered call writing newsletter service, is to generate 15%-20% returns each year. We're way ahead of that goal so far.
All we're doing is buying cheap stocks and then getting paid to give someone else the right to buy the stocks from us at a higher price. Like I said, it's simple. For someone who likes to follow the stock market on a day-to-day basis, it might even be a little bit boring.
That's where the other 10% of your market portfolio comes into play...
Reasonable speculations with call and put options are a good way to juice up the returns of a conservatively managed portfolio. The key word here, of course, is reasonable. Limiting your maximum speculative exposure to just 10% of your investment capital ensures longevity in the trading game and prevents any losses from getting out of hand.
You'll do even better if you limit the maximum exposure of any one trade to just 1% of your investment capital. So you'll have at least 10 different trades you can make with the speculative portion of your portfolio. The objective here is to swing for the fences with a small amount of money. If it works out, you can significantly increase your overall investment returns. And if speculating turns out to be a total bust, it won't wipe out your account.
We're doing pretty well with our speculations in the S&A Short Report so far this year. We've closed out 20 trades. Fifteen were profitable. And four of those earned more than 100%. Overall, the average return of each trade is just about 40%.
Combining covered call writing with reasonable speculating creates the Split Personality Investment Portfolio. Here's how the numbers work out with a hypothetical $100,000 account...
If you invest $90,000 in a covered call writing strategy and earn 15%, that money grows to $103,500 in one year. So, even if you lose the entire $10,000 committed to speculation, the account is still up 3.5% for the year.
If you can break even on your speculations, then the account is worth $113,500 ($103,500 + $10,000) – a gain of 13.5%, which is not bad for a conservatively managed account.
On the other hand, if you can bag a few winners on the speculative side, then you can really juice up the returns of the entire portfolio. For example, a 40% return on the speculative portfolio boosts that side of the account to $14,000, making the entire account worth $117,500 ($103,500 plus $14,000) – a gain of 17.5%.
Of course, the larger the returns on the speculative side, the larger the overall gain. The important point, though, is even if all of the speculative money disappears, the account still gains value.
As I wrote earlier, it's tough to lose money with this strategy. And that makes the Split Personality Investment Portfolio a near-perfect investment strategy for today's market.
Best regards and good trading,
Make 3% per Month – Every Month
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