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How You Can Beat "The Street" in Today's Stock Market

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While most retail investors believe that they can't beat The Street because the "little guy" is disadvantaged, the fact is they can, precisely because they're the "little guy."

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The Disadvantaged Pros

Professionals have to adhere to "portfolio" mandates. This means that, contrary to what most individual investors believe, most pros face limited choices.

For instance, many can't go to cash when the markets get crazy; even if they wanted to do this and thought it prudent, their portfolio mandates might restrict such a move. What's more, very few professional investors actually have complete discretion in choosing the assets they invest in or the tactics they employ. Clients pay these people to invest so they're not expected to keep cash sitting around.

As an individual investor, on the other hand, you can do any damn thing you want. You have the ability to go completely to cash if the markets get too out of hand (although I don't advise this, since missing the "best days" of the market can dramatically reduce your returns ... but you have the option, which most pros don't).

But most importantly, you have the ability to construct and use an investment plan that's elegantly simple like the "50-40-10 portfolio" I created.

Even though it does come under pressure from time to time, the built-in safety brakes, high income and easy-to-use hedges will prevent investors who follow it from getting clobbered. Mutual-fund managers and other pros, on the other hand, may just have to endure the beating.

Stay Invested ... to Beat The Street


Many investors feel like running for the hills on days like last Thursday and I do not blame them one bit. It's really tough to watch the markets get carried out feet first and to watch the panic that grips the markets on days like that.

But running for cover is precisely the wrong play to make.

You actually want to do just the opposite: You want to hold your nose and take the plunge.

If you are following a well-defined plan like the 50-40-10 pyramid, you'll already be in-synch with the natural ebbs and flows of the broader market. In fact, you should always maintain a "short list" of stocks that you want to buy on a decline. That way, you can view any downdrafts as a long-awaited chance to get choice stocks "on sale."

The trick is to make sure to have a full repertoire of tactics -- much like an ace starting pitcher has a full complement of pitches -- that you can use to adapt to any given situation.

For instance, if things are relatively calm and sentiment is good, you can allocate more per trade and buy in all at once, while concentrating on profit targets to maximize the use of and return on your capital. When things get rough, you can take the opposite approach and use tactics that control risk while making sure to limit the amount of money you have on the table at any one time.

There are literally hundreds of potential tactics that you can employ.

It's impossible to know when, why or how the markets will turn. But this arsenal of investing tactics or weapons will allow you to adapt to, and capitalize on, whatever market conditions come your way. That way you can adapt your risk profile appropriately, still get the best prices and, most importantly, keep your upside in play.

Right now, things are obviously rough. That's why I think any investor should be pursuing a "safety first" approach to their pursuit of portfolio returns. One of the simplest ways to do that is to split your capital into equal chunks and invest it over a period of months. That way, if the markets drop after you purchased your position, you haven't bought in all at once, and don't suffer a catastrophic loss. In fact, if you buy in equal increments as the market falls, you're effectively buying in at lower prices.

If they rise, so what? You have a piece of the action. It may not be as large as you like, but that's moot -- at least you haven't been left at the station.

And finally, as part of the buying process, make sure you're always selling -- especially in down markets. After all, the new money you're putting to work can just as easily come from existing investments as it can from fresh contributions to your retirement funds. My favorite is to simply use "trailing stops." It's a forced discipline, and it works. If the markets force my hand, I simply take my money off the table and redeploy it with no emotional turmoil and no indecision.

I could go on. But I think I'll end here with three thoughts to help you be more effective in your bid to beat The Street:

1. The issue is never about how much you make; it's about how much you keep.
2. Investments should be based on where you are going, not where you've been.
3. Volatility is merely what happens until you get to your destination.

Editor's Note: Keith Fitz-Gerald is the chief investment strategist for Money Morning, an online investment research site.

No positions in stocks mentioned.
Fifteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 15 for 15, meaning he's closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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