Flat for Safety
Research for Online Investors
This article originally appeared in MarketToday on
Going into the worst of August and September we
were long in precious metals in our premium service portfolios. The idea was one of owning “non-correlated” assets.
We viewed precious metals as rising or falling independently of the equity markets. We all know how that ended. We
ignored the old saying of traders “Throwing the Baby out with the Bathwater.”
Precious metals took a dive as equities sold off
and traders had to raise cash. It didn’t help that CME raised margin
requirements. Bottom line, when any market is under pressure, it drags
down every other market. Crude oil, base metals, cotton, corn and
precious metals all were under pressure as traders and investors liquidated positions to exit the market for
Go Flat for
We hadn’t heard the term, but knew what we
wanted. We used the term “non-correlated” assets in letters to our
premium subscribers to describe our reason for the heavy precious metals positions. We have since learned the term “Going Flat.”
We have now employed this practice during the
worst of the markets down days, except we are not buying precious metals! We are buying “correlated assets.”
Except our correlation is almost exactly reverse of the equities we own in our portfolios.
What does “Going Flat” mean? When the market is moving lower, we want to buy an asset that will move exactly
opposite of the equity positions we are currently own. When our
portfolio goes down in value, our correlated asset increases in price.
This has been a revelation. It is easy to freeze when the computer screen is all red. What do you do? Should you start
selling? Should you ride it out and see if the market will bottom and
bounce in the last hour?
Every one of us has sold out of fear, and then
watched the (now departed) stock rally and close back at its opening price the same day! This is one of the fundamental truths, and challenges, of
“Going Flat” takes the fear out of the
trade. You are simply making a decision to remove risk from the
market. Your goal is to freeze your portfolio value at
present. We do this by buying a reverse ETF that rises in price as our
equity positions fall in price.
It allows you to relax and watch the stock market
with detachment, as you are not being injured. The difficulty is sizing.
We use the TZA (Small Cap Bear 3X) ETF. All of our premium services use
strict asset allocations. Five-percent of total investment per position
in the Long-Term and 10-percent in Buy, Sell, Hold and SwingTrader. When
you want to Go Flat, you have to throw this out.
This was the hardest part for me, because I
believe in small relatively equal size positions for investing and trading. But we are not investing or trading, we are Going Flat. In other words, there is no appreciable risk. If the market goes down reducing our portfolio value, our correlated asset should
increase by roughly the same dollar amount. If the market goes higher
increasing our portfolio value, our correlated asset will decrease by roughly the same dollar
How do we do this? The TZA is a three times Ultra ETF, so we need to buy a “super position” equaling
one-third of our portfolio in TZA. If our present investments total
$100,000, we must buy $33,333 in TZA to Go Flat and offset the changes in value of our
There is minimal risk. If the market moves higher, the TZA position will lose value at roughly the same
rate your portfolio is appreciating. No Gains, No
That is Going Flat. I like it.
We haven’t recommended increased position sizes to
our premium service subscribers yet, but we will be soon. We have been
employing large “Super positions” to Go Flat in our managed funds to good effect. If you are fatigued from fighting the market, check out our Portfolio Management Service. We do it in your
Scottrade Account. If we don’t make you money, we don’t charge you
money. This is your chance to enjoy life and let us worry about
protecting your nest-egg.
The information presented in this newsletter is based on generally available news releases, corporate filings,
current events, interviews and the editor’s opinions. It may contain errors and you should not make investment
decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose
it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any
securities discussed. The editor may have held a position in a security earlier, or in the
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