Tuesday, December 23, 2008
After making a 13% return in 2005, 14% in 2006, and 22% in 2007, my account is down about 40% in 2008 - just like most stock indexes and funds.
However, unlike the days when I aggressively day traded, I am still calm and tranquil. I believe in my trading system, and know that bear markets such as these are what feed the rebalancing mechanism of my system that allows me to "win through defense" - like Bears football.
Now, it is the end of another year and I plan to rebalance my positions next week. The only thing I might have done differently was to have saved more in the cash part of my account.
Normally, when you buy a new position under my system, you have to add a certain percentage of the amount to the cash portion. But, I also have the rule that you can waive this when you are making regular contributions because you can use future contributions to rebalance.
This year, all my positions are down enough that, when I applied the system's formula to my stocks, I found that I had to add a lot. I had to transfer more cash from my bank, but I did not have enough to rebalance every position.
So, according to another rule, I picked the 2-3 worst performing stocks in my portfolio and sold those off. That freed up a little more cash but, more importantly, meant that I have three less stocks to rebalance.
In all my testing, it is better to sell off a couple of stocks at a loss, and rebalance stronger stocks, rather than leave all the positions unbalanced.
The complete rules behind my successful stock trading system (along with chapters on topics such as variations, minimizing commissions and taxes, etc.) are described in my book, Stock Trading Riches, which is available on Amazon.com.