Sunday, August 5, 2007

Finally, some volatility...the opportunity to outperform the markets

In my last post, I noted that the market felt a bit bubbly and that my system was flashing sell. While I couldn't predict the market's direction, I did predict, and look forward to, increased volatility. And boy, have we had volatility!!

Since that post, markets are down about 7-8%, and have been very volatile in the process. That has provided my "Dollar Cost Averaging on Steroids" system with an opportunity to shine, selling at the highs and now buying back the indexes while they (at least relative to a few weeks ago) are on sale. As usual, the system is forcing me to do things that feel uncomfortable, like selling on the euphoria of market highs and buying into down markets. Of course, only time will tell whether the market will continue downward from here or recover. But it is certain that this volatility has provided an opportunity to outperform the markets.

You see, outperforming the markets is relatively easy, with some simple systems and tools, as long as you have uncorrelated and volatile markets. When I talk about outperforming the markets, I'm referring to the weighted averages of whatever markets you are in. For me, that includes a wide range of US and International Stocks and Bonds, but the principals apply to any market.

I don't want to be repetitive with previous posts explaining the system, but the key is as simple as dollar cost averaging and aggressive rebalancing.