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.

Position sizing is what matters, says Brian Hunt, editor in chief of Stansberry Research in yesterday’s Growth Stock Wire. Trading psychologist Dr Van Tharp says its how “great traders manage their money.”

Smart position sizing is easy: never risk more than 2% of your capital on any one trade.

That’s it. We told you it wasn’t complicated. But would be surprised how few traders and investors actually follow this rule.

Here’s how it works. Take it away, Brian…

Let’s say you’re a trader with a $50,000 “grubstake.” And you’re thinking about buying Intel at $20 per share.

How many shares should you buy? Buy too much and you could suffer catastrophic damage if, say, an accounting scandal strikes Intel. Buy too little and you’re not capitalizing on your great idea.

Here’s where intelligent position sizing comes in. Here’s where the concept of “R” comes into play.

“R” is the amount of money you’re willing to risk on any one position. You can easily calculate R from two other numbers: 1) your total account size and 2) the percent of your account you’ll risk on any given position.

Let’s say you want to go “middle of the road” with your risk tolerance. You’re going to risk 1% of your $50,000 account on each idea. Your R is $500. (If you wanted to dial up your risk to 2% of your account, R would be $1,000.)

OK, so you’ve already decided you want to put a 25% protective stop loss on your Intel position. Now you can work backward and determine how many shares to buy.

Your first step is always to divide 100 by your stop loss number: 100/25 = 4.

Now, take that number and multiply it by your R: 4 x $500 = $2,000.

So you should buy $2,000 worth of Intel… At $20 per share, that’s 100 shares. If Intel declines 25%, you’ll lose $500 and exit the position.

If you really want to become a successful investor and stay that way, you should read Dr Van Tharp’s Trade Your Way to Financial Freedom and Jack Schwager’s Market Wizards, if you haven’t already. Both hammer home the importance of proper position sizing.

These books are to trading what the Bible is to Christianity. Make them your friends. We guarantee you’ll be a better investor as a result. We’ll leave the last word on position sizing to Tharp…

Perhaps the greatest secret to top trading and investing success is appropriate money management or what we now call position sizing. I call it a “secret” because few people seem to understand it, including people who’ve written books on the topic. Some people call it risk control; others call it diversification. Money managers call it managing other people’s money and still others call it how to “wisely” invest or spend your money.

Of course, it helps if your trades make gains. Even with proper position sizing, you still need to be right more than you are wrong. Otherwise, you will eventually be forced out of the game.

One Wall Street insider’s “secret formula” produced 438% gains in January 2009. The man behind this strategy hit the markets head on with his brand new formula. It’s based on three ultra-timely criteria. These include a new way to profit from extreme volatility and a signal that Forbes calls “one of our favorite bullish indicators.”

Notes readers can get full access to this formula right now by claiming two free months of his specialized research. But you have to act fast. Once the doors are closed on this offer, you’ll have to pay full price to get in.

This from The Sovereign Society:

Does market-timing work? Better yet, does it matter if you’re a long-term investor dedicated to stocks or other asset classes? Don’t most investments appreciate over time?

The evidence suggests that knowing when to enter and exit a market can make all the difference in the long run.

Investment pros ranging from Warren Buffett (Berkshire Hathaway) to John Bogle (Vanguard Funds) chastise market timing. Hedge funds – which charge high fees to time entry and exit points in global markets – failed miserably in 2008, posting an average 18.3% loss according to Hedge Fund Research. Worse, only several U.S. mutual funds actually earned a profit last year while the remaining 8,500 or so suffered 40%-plus losses.

In 2008, the S&P 500 Index plunged 38.5% – its worst year since 1931. The MSCI World Index, a composite of global mature market common stocks logged its worst year since its inception in 1969 – down 42%. Within the emerging markets universe – including New Frontier countries with esoteric markets like Vietnam, Bahrain and Croatia – not a single bourse recorded a profit, according to MSCI Barra.

Ten Years and Counting…

Investors can’t time the market consistently. And that applies to both individuals and professionals. But does it really matter? The answer is a resounding “Yes!”

Investors who purchased the S&P 500 Index at the height of the last bull market in March 2000 are still licking their wounds almost ten years later.

A US$10,000 investment in the S&P 500 Index in 2000 would be worth $7,000 through December 31, 2008. That’s a 30% decline and confirms America’s “Lost Decade” as it pertains to stock investing.

Despite the dollar’s big decline since 2002, which boosted the value of foreign shares when measured in dollars, the MSCI World Index turned an original US$10,000 in 2000 into US$8,007, a 20% loss. So much for passive long-term investing…

Timing a Depression Low

Yet the same investor who plunked US$10,000 into the S&P 500 Index back in 1982 – the last secular bear market low – would have seen their original investment grow to more than US$150,000 through December 2008.

What’s even more amazing is how market timing paid off in spades even during the Great Depression. An investor with the dreadful foresight of investing US$10,000 back in October 1929 in the Dow Jones Industrials Average (Dow) would have seen his investment crash to just US$1,400 by June 1932 or a massive 86% wipe-out. Yet again, timing the market paid off brilliantly starting that same year when the U.S. market hit a low for the cycle.

From its bear market low of just 41.22 in June 1932, the Dow skyrocketed all the way to 194.40 by late 1936 – a whopping 372% return, excluding dividends. By 1937, however, the Dow began to fall apart again and crashed 33% before finally bottoming in 1942.

Yet under FDR, the market seemed to gain traction by rallying a cumulative 121 points or rising four consecutive years starting in 1933. Once again, timing the market made a huge difference.

An investor who purchased the Dow in mid-1932 would still have earned a profit through 1942, the year the market finally bottomed.

But the poor unsuspecting investor who came aboard in September 1929 would have waited until 1955 to break-even. Waiting 26 years to recover your capital isn’t exactly the Field of Dreams; yet that’s exactly what might be in store for those investors who bought stocks at the height of the dot.com bubble in early 2000.

Bear Market Bottom still Lies Ahead

I’m not convinced the November 20 low was the ultimate bottom in this bear market. It might be another in a series of intermittent lows since stocks peaked in October 2007.

Stocks might appear to be cheap against all valuation measures, including government bonds, inflation, T-bills and risk, including the VIX Index. But it’s hard to make a compelling case for equities when corporate earnings will remain hostage to a crash in domestic consumption, a freefall in residential housing and soaring unemployment. Valuations alone don’t terminate bear markets.

The Mother of Buying Opportunities

Sometime over the next 12-18 months the stock market will form “the” bottom. That event will mark the greatest entry point for stock investors in more than 27 years, possibly longer. And just like 1932 when the market hit its low point investors will sow the seeds for humungous long-term profits.

Timing the market does make a big difference. The historical evidence strongly suggests that knowing when to buy or sell stocks can either make or break the individual investor. History also tells us that stocks are likely to muster a massive calendar year rally or more under President-elect Obama, similarly to FDR starting in mid-1932.

Source: Market-Timing and the Mother of Market Bottoms