This one investing rule could drastically improve the performance of your portfolio…
I’m not talking about asset allocation, position sizing or stop losses. Sure, those are great rules… but they won’t immediately improve your overall performance.
After all, it doesn’t matter how diversified your portfolio is, or how small of a position you take, or even if you have a stop-loss set in place — the fact remains, if you buy the wrong stock at the wrong time you will lose money. It’s that simple.
[ad#Google Adsense 336×280-IA]Now, I’m not saying that by following this one rule you will never lose money.
But what I can guarantee is that this simple strategy will help you know which stocks to buy and exactly when to sell them.
Take Apple (Nasdaq: AAPL) for example.
Apple is one of the most fundamentally sound companies on the planet.
For years, the popularity of iPods, iPhones and its computers caused earnings and cash flow to soar.
Since 2003 alone, the company’s annual revenue rose from $6.2 billion to $182.8 billion.
And if you were an investor focused only on Apple’s fundamentals — a strong company with a pristine balance sheet that saw earnings soar — you made a fortune. From 2003 until today, Apple’s stock has returned more than 10,740%.
But its journey hasn’t come without some serious rough patches…
For instance, back in September 2012, shares of Apple hit an all-time high of $95.39 per share (split-adjusted) and the company was among the strongest firms on the planet, raking in profits hand over fist.
But that didn’t matter. Neither did the fact that the company had initiated a dividend to return billions of dollars to its shareholders. Apple investors quickly shifted from a state of euphoria to a state of panic as they sent the company’s shares tumbling dramatically.
If you had invested in Apple at its 2012 peak, you would have lost 43% in just seven months, despite the broader market rising 7.9% over the same time period.
But if you had this simple trading tool at your disposal, you could have avoided that drop altogether.
To be more specific, the tool I’m talking about is “relative strength.”
If you’ve never heard of relative strength, don’t worry. It’s simple to understand.
Relative strength (RS) is found by calculating the percentage price change over the past six months for every stock. You then sort these changes from high to low and assign the highest value a relative strength rank of 100 and the lowest value a rank of 0.
Every stock is assigned a rank based on where it fits into that range. In our premium advisory, Maximum Profit, we use 70 as the limit for buys and sells. If relative strength is greater than 70 (meaning a stock is rising more than 70% of the market), the stock is a buy. We sell whenever the rank falls below 70.
A simple buy and hold strategy on Apple would have netted you some nice gains, but by following this one trading rule, on a $10,000 investment, you could have made an extra $2,400 on Apple in half the amount time.
Let me explain…
You see, knowing which stock to invest your money in is important. But even if you invest in a sound company like Apple at the wrong time, it can have a devastating effect on your portfolio.
You can see the difference between a “buy and hold” strategy versus our Maximum Profit strategy in the chart below:
In our comparison, our Maximum Profit system triggered a sell when Apple’s relative strength fell below 70 back in October 2012 (when the shares were still above a split-adjusted price of $91). An RS below 70 is a crystal clear signal that investors should get out.
By selling when Apple’s relative strength dropped below 70, you would have booked a nice 60% gain — worth $6,000 — in less than 10 months.
Buy and hold investors saw their original $10,000 investment fall all the way to $9,400 — a 6% loss — and stay there for months. That one signal could have saved an investor from losing hundreds, if not thousands, of dollars.
What’s more, this signal would have got them out of an underperforming stock during one of the best market rallies we’ve ever seen — allowing them to put money to work elsewhere.
When all was said and done the Maximum Profit strategy held Apple for 18 months compared to 3 years for buy and hold investors. Bottom line: by following this one rule, investors would have made nearly $2,500 more in half the time.
It’s proof that if you aren’t using trading signals in your investing, then you’re missing one of the most important tools to beat the market.
Good investing,
Jimmy Butts
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Source: Street Authority