How to beat the Dow

I’ve long argued that the individual investor has advantages over the institutions in the stock market. Today I’m going to share with you how, using only the stocks that make up the Dow Jones Industrial Average, you could have used TradeStops to handily outperform the DJI over the past several years … and taken less risk in doing so. So here are the TradeStops tips for beating the dow.

We began our study on September 21, 2012. That was that the date that United Health Group replaced Kraft Foods in the DJIA. Here’s the performance of the DJIA since that time:

FYI, there have been 4 other component changes to the DJIA since September of 2012. In September of 2013 there were 3 changes. Goldman Sachs replaced Bank of America. Visa replaced Hewlett-Packard. Nike replaced Alcoa. In March of 2015, Apple replaced AT&T. All of these component changes have been incorporated into our study.

Since September 21, 2012, the DJIA is up about 33.6%. We could have done better using the TradeStops practice of equal risk position sizing. Let me show you exactly how.

For the purposes of this study we used the TradeStops Risk Rebalancer, which is part of the TradeStops Premium suite of services. The Risk Rebalancer takes a portfolio of stocks and an amount of capital and balances the volatility risk across all the stocks in the portfolio so that all the positions have equal dollar risk.

We rebalanced annually and whenever there was a component change in the DJIA. For those that want the nitty gritty details, we rebalanced on Sep 21, 2012; Sep 20, 2013; Sep 19, 2014; Mar 18, 2015 (Apple addition) and Mar 18, 2016.

The TradeStops Risk Rebalancer favors lower volatility stocks. It allocates the most capital into the least volatile stocks and it allocates the least capital into the most volatile stocks. It’s a very powerful principle of risk management because many investors do exactly the opposite. We tend to invest more money into the stocks that we’re most excited about – which often turn out to be our most volatile stocks.

Following this principle of equal-risk position sizing is the most powerful thing that I’ve discovered in my 20 years of investing and developing tools for investors. Here’s how this one simple change impacted performance across the portfolio of stocks known as the Dow Jones Industrial Average.

By letting our capital favor our lower volatility positions (according to our precise mathematical algorithms), we improved the overall performance over the period of the study from 33.6% to 38.6%. I know that might not seem like a huge difference but overtime, these kinds of small improvements really add up!

What’s particularly impressive to me about the above result is that there was never a time when our equal-risk position sizing approach underperformed. It either matched or outperformed the DJIA the entire time … and the outperformance has steadily increased overtime.

That’s impressive.

Moreover, it achieved this outperformance with less risk. Take a look.

The above screenshot is from the TradeStops Risk Rebalancer. It shows the current DJIA portfolio before and after rebalancing.

Before rebalancing the Portfolio VQ (PVQ) on the DJIA was 10.67%. That’s already pretty low. After rebalancing, however, it was even lower … just 10.49%. Moreover, in the bottom section of the above screenshot you can see how the TradeStops Risk Rebalancer moves more capital into the low risk stocks and out of the medium risk stocks.

Make more. Risk less. That’s the TradeStops way … and I see more and more evidence every day that TradeStops is fulfilling its mission to help individual investors do the same,

Sincerely,