Don’t Trust Your Gut. Trust the System
In August of 1971, Ray Dalio – now one of the most respected hedge fund billionaires on Wall Street – was a lowly clerk working on the Street.
By coincidence, Dalio was starting his career during one of history’s critical turning points. President Nixon had just taken the dollar off of the gold standard.
Dalio figured the market would crash the next day. But instead, it rallied – hard. The Dow finished the day almost 4% higher.
Now, it’s not much of a stretch to compare that period of time to today. Then – as now – you had central banks meddling in the markets. And then – as now – you had unexpected results.
Dalio learned a lesson from his experience.
He realized that the market has a knack for doing what you least expect it to do… and he reached the conclusion that, rather than trying to guess what happens next, the better course was to simply build a portfolio that would perform well in any environment… no matter what happened.
So he launched his All Weather portfolio, and the rest is history.
Now I’m not necessarily recommending you run out and invest with Dalio. Even if you wanted to, you wouldn’t meet the minimums. After all, you need $5 billion in investable assets just to get in the door.
But I do recommend that you rip a few pages out of his playbook.
First, ask yourself the same question he did:
What kinds of strategies can I implement that will work in any market, bull or bear?
With stock prices at all-time highs – and with the Fed’s next move anyone’s guess – you need to be confident that your strategy will handle the unexpected.
And as you look for answers, be systematic.
Set your trading rules in advance and follow them – verbatim.
If you’ve done proper back testing, then you should have faith in your system to do its job once a storm hits. If you don’t have faith in your system, then you have no business investing with it.
And perhaps most importantly, do not let your emotions cloud your judgment and push you to override your model.
Your emotions will betray you every time, and the most successful traders are those that either have a super-human ability to always control them (which is exceptionally rare) or simply remove them from the equation altogether.
That’s how my friend and colleague Adam O’Dell does things.
I have never – as in not once – heard Adam tells me how he feels about the market or about what he thinks will happen next because he removes his emotions and human reactions completely from the equation.
Instead he’s built a system that tell him what’s probable simply based on past experience.
Adam’s system is also designed to work in any market because, unlike a traditional buy-and-hold strategy, he isn’t always invested. He only buys when the sector he’s eyeing is in a pronounced uptrend and starting to show momentum. And he also has the ability to bet the other way… actually shorting sectors that are in a downtrend.
It works because, as Sir Isaac Newton himself put it, an object in motion stays in motion.
Adam’s research has shown that outperforming sectors tend to continue outperforming over the following 2-3 months, so he structures his recommendations to fit within that timeframe.
Whether the longer-term trend is bullish or bearish, his readers stand to profit from these intermediate-term moves.
I have no way of knowing when the next market crash will be. But I can say with a lot of confidence that when it hits, most investors will respond the wrong way.
They’ll hold on too long and then end up selling at the bottom, right before it starts to rally again. And they’ll do this because their emotions will get the better of them.
Don’t do that.
Learn from Ray Dalio… and from my friend Adam.
Keep calm… stick to a proven system… and watch your portfolio succeed no matter what the market’s doing.
– Charles Sizemore
Chief Retirement Strategist, Dent Research