Position Cost Averaging for Risk Management
Filed Under Main Content, Services for Traders, Trading Software
Hi Toolbox Fans,
As you may or may not know, we launched the Position Cost Averaging software more than 10 years ago and released a newer version last year.
The PCA system is designed to manage a long-term portfolio by using a cash component to allow the lowering of cost per share over time. It is a very interesting model that has been around since the late 70′s.
Anyway… we loaded up a model portfolio on August 6th of 2008.
The market was about 20% higher then and we stocked up on index ETFs as well as some sectors, commodities and even one leveraged ETF.
We saved a cash reserve equal to the the shares we bought and used that “in case” the market went down.
Well, the market did go down…way down.
The leveraged ETF was a disaster. We lost 25% on it and I recommend to everyone NOT to hold leveraged ETFs in any long term portfolio. (exited the entire position last week)
As the market fell apart into the financial abyss the software went into a buying frenzy. The buy orders just kept coming.
I purposely manage this portfolio in a very haphazard fashion updating it when the idea strikes me.
The market bottomed, came back up and we finally started getting some sell orders.
After a recent barrage of selling I decided to look at how we are doing since we started.
Today I opened it up and ran the quotes to discover another round of selling.
I will take this round of sell orders as well because I will want the cash on hand to buy back in at lower prices.
In the Indices portfolio I am getting sell orders on SPY, IWM and DIA.
The Sector Portfolio is selling off a bit as well with sell orders on GDX, SMH and XLE.
The commodities are all holding and we sold the entire QLD position as it was a bad idea to begin with.
Total portfolio picture is this…
We started with a portfolio value of 472,613 and now we have a portfolio value of 471,728 so we are down a mere 885 bucks or 0.2%.
That is not bad at all when you consider the prices of our initial purchases way back in August of 2008. The market had not really fallen apart yet and the collapse provided the buying opportunities to load up the portfolio.
Now we are sitting on many more shares than we started with at a much lower average cost per share.
We’ll see what happens going forward and since we have about a 25% cash reserve available we may get a chance to deploy more cash should we get considerable weakness from here.
With 75% of the portfolio invested, we could also get a chance to lock in more cash if the market pushes higher.
The beauty of the PCA strategy is having a plan in place no matter what.
I also rolled out a new 30 day free trial version for PCA and If you would like to check it out… Please do.
The idea is to buy low and sell high and really, that is all the software can do… it is really quite ingenious.
It is based on the book “How to Make $1 Million Dollars in the Stock Market Automatically” by Robert Lichello and we have people using this software in more than 70 countries around the world.
The help section in the software has videos to show you how to use it and a whole bunch of resources related to this type of investing.
If you know any long-term investors who could use a good tool, tell them to check it out as well.
You can see it at http://www.StockSystem.com
Until next time…
Buy from the scared… sell to the greedy with PCA.
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