INVESTMENT ADVICE FOR 2009. AND MAYBE SOME FREE LUNCH.

The Author has not dispensed much investment advice recently. With the market turmoil he cannot recommend his day trading strategy to others for numerous reasons. Much of the Author’s methodology involved shorting the market in 2009 with inverse index ETFs such as QID. QID is a doubly-inverse fund

But funds can use leverage the other way. You can buy ETFs that are doubly- correlated to its underlying index. So for a fund like SSO, if the S&P 500 goes up 2.5%, SSO will go up 5%.

Unfortunately, it works the other way, but that is the way that life with the wolves works.

MARKET SHOWS SHORT TERM STRENGTH.

The market indicators that the Author follows are all positive and the Author further believes that the market has short-to-medium term strength. So if you still hold stocks or stock mutual funds, hold on. If you are out of the market and on the sidelines, now might be a good time to dip a toe back in.

Many investors are index fund investors. They own funds that track indices such as the S&P 500 and the NASDAQ index. These funds have low transactional costs and are a well-recognized buy-and-hold tool.

ARE YOU A BUY AND HOLD INVESTOR WITH INDEX FUNDS?

If you are, keep reading. The Author will show you how to improve your earnings without substantially raising your risk. A little free lunch, perhaps?

Here is how:

1. Instead of holding index funds for the S&P 500 and the NASDAQ (and perhaps the DJIA), buy double index ETFS. Here is an example:

You have a $100,000 portfolio. $50,000 is in an S&P 500 index fund and $50,000 is in a NASDAQ index fund. Not an uncommon portfolio model.

But if you buy doubly-correlated ETF index funds such as SSO (S&P 500) and QLD (NASDAQ), you will only spend a total of $50,000 to buy substantially the same equity exposure. You put $25,000 into SSO and $25,000 into QLD.

2. You now have $50,000 left. You could speculate with this money, buying stocks or other investments that you believe will outperform the market. But likely you will not since you already pursue a conservative index fund investment strategy. Instead, you take the remaining $50,000 and place it into a money market fund. Here is what will happen.

3. You will get the close to the market returns, whatever they are, for the S&P 500 and the NASDAQ. So if the S&P goes up 5% and the NASDAQ goes up 6%, your $50,000 will earn:

a. $5,000 for the S&P ETF SSO.
b. $6,000 for the NASDAQ ETF QLD.
c. $1,250 for the Money Market.

Basically, the $1,250 is free lunch, or money that would have been left on the table had you owned $100,000 of straight index funds. You get an extra 1.25% return.

SO WHAT IS THE DOWNSIDE?

There is a risk to this strategy. The risk is that the doubly-correlated fund will not exactly track the underlying index. How great that risk of deviation is the subject of another post, or reader comments. But to the Author's experience, it has been minimal.

DON’T SAY THAT THE DESERT OF THE REAL NEVER GAVE YOU NUTHIN’!

IMPORTANT DISCLAIMER: This blog is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The author may or may not buy or sell securities discussed in this newsletter.