This simple technique will save you a fortune if you apply it to your investments. We’re talking about asset allocation. Let us explain… Playing the markets means you must accept an ever present degree of uncertainty. 

Stock picking and market timing, two important techniques to master if you want to make money by investing, come down to what is essentially guess work. Every day we “guess” what stock or security will rise or fall at a particular time. Great investors may be right 60% of the time. But the point is we can’t rely on being right; we can only trust our research and market insight.

This is where asset allocation, or portfolio management, comes in. Asset allocation allows us to minimize risk and maximize profits by rebalancing your portfolio. This means diversifying your investments across different asset classes.

According to our friends at Investment U, a smart way to effectively allocate your portfolio is to follow the model below.

In fact, on Saturday April 4, I spoke at a conference in Orlando and the crux of my presentation was why buy and hold isn’t the way to go anymore.

After my presentation, one of the attendees asked me why I felt buy and hold was dead.  What has happened in the market that caused the long-held belief that buying and holding a stock or the market forever is not the way to invest?

Where do I start?

With the help of my colleague Christian Hill, we went back to 1950 and looked at the S&P 500 over the last six decades.  Here are the returns per decade.

As I looked at these results, I started thinking about how different the market is now compared to the 1950s.  How many people do you think were actively investing in the market in the ‘50s and ‘60s?  Not too many I would guess.  Maybe four or five million at best.  People may have had money in pension plans and the like, but the funds were being managed by a professional investment manager.

In the ‘70s and ‘80s we saw tremendous growth in Individual Retirement Accounts and mutual funds.  This made it easier for the average Joe to get involved in the market.  In the ‘90s, we saw two things greatly impact investment growth- 401(k)s and the internet.

Look at how the ‘90s were the biggest growth decade for the S&P 500.  Do you think that is a coincidence?

By 2005, there were 436,207 plans, 44.4 million participants and $2.4 trillion in assets in 401k plans.  Do you think the growth in participants and growth in assets had anything to do with the tremendous growth in the market during the ‘90s?  You bet it did.

Take a look at the 20-year periods.

Look at the tremendous growth in the last 20-year periods.  I also decided to break it down into two periods, the first 30 years without 401(k) plans and the 20 years since 401(k) plans were introduced.  From 1955-1985, the S&P went up 350%.  This is an impressive number, but from 1985-2005, the S&P jumped 632%.

The second thing that happened in the ‘90s was the onslaught of the internet and internet brokerage firms.  Instead of having to have an account with Merrill Lynch, Shearson or Paine Webber, individual investors could open an account with any number of online brokerages and pay one-tenth the commissions charged by the mainstream brokers.

I am not saying whether I think 401(k)s and online brokerage firms have been good for the overall market.  But what I do know is that these two creations have had a profound impact on how you have to view the market.

They have created easier access to the market and created more involvement from more people.  Unfortunately, they did not come with more education about the markets.  This is why I think traditional views on investing have been changed forever.

God help us if the plan to allow self-directed Social Security ever comes to fruition.

Source:  How Has The Market Changed Over The Last 60 Years?

A few weeks ago in the State of the Market special report, I cautioned the bears to look out for a sharp rally. The market was just looking for an excuse to rally. Enter Citigroup (NYSE:C) (which I suggested was worth taking a flier on in last week’s article) with word that they made money in the first two months of the year.

Here is what I would suggest. First, if you are looking at the short-term, I would look for the market to continue to rally over the next few weeks. Getting the indices out of the historic oversold level we reached a few weeks ago. Second, if I am looking at the long-term, I might be wading in at this point, but I would not be diving in headfirst will all my money allocated to stocks.

I know many investment professionals say you shouldn’t try to time the market, but I have to disagree with them. You don’t have to time the tops and the bottoms, but you certainly should be adjusting your asset allocation based on whether or not we are in a bear market or a bull market.

How do you know which one we are in? There are hundreds of answers for that, but a simple one that I have been using and testing is a crossover of the 6-month and 12-month moving averages for the S&P 500.

Look at the chart below. Over the last 20 years, had you loaded up on stocks when the 6-month crossed above the 12-month, you would have been heavily allocated to stocks from late 1994 until late 2000, heavily allocated to bonds from 2000 until early 2003, back into stocks from 2003 until early 2008, and then back to bonds. Is it perfect? Of course not. It doesn’t get you in at the exact bottom and it doesn’t get you out at the exact top. But it does have you in for the bulk of the move.

How effective would this S&P timing signal have been over the last six years? Well I looked at three portfolio scenarios after the last bullish signal in early 2003 until the end of 2008.

Scenario 1- all money was put into four equity ETFs- the Diamonds (NYSE:DIA) (the Dow), the Spyders (the S&P 500), the QQQQ (the Nasdaq 100, and the IWM (the Russell 2000). There was no timing used in this scenario, it was strictly buy and hold.

Scenario 2- 80% of the money was put into the four equity ETFs in scenario 1 and the remaining 20% was put into three different bond ETFs. This scenario also used a buy-and-hold strategy.

Scenario 3- using the simple timing mechanism mentioned above, 80% of the portfolio was in the four equity ETFs and 20% in the bond ETFs until March 2008. At that time, the funds were reallocated to 30% in the four equity ETFs and 70% went into the three bond ETFs.

So how would you have fared using this strategy? Look at the chart below. Assuming a starting value of $1,000,000, at the end of 2008, your buy and hold strategy for stocks would have produced an overall gain of 14% and the buy and hold strategy with bonds and equities would have gained 19%. The clear winner was the one that used the timing mechanism. This strategy would have produced an overall gain of 52%.

Notice on the chart how Scenario 3 trails the other two ever so slightly for the first four years, loses ground in 2007, but saves you massive pain in 2008.

Getting back to the original theme, as a short-term trader, I would be playing the long side of this market for the next few weeks with an eye on the earnings season that will start in approximately three weeks. As a long-term investor, I would be dipping my toes in the water for now, but I would wait for confirmation of the 6-month moving average crossing back above the 12-month moving average before changing my asset allocation back to mostly equities.

Source: Simple Timing Tool That Will Help You Protect Your Assets