Correlations And Profitability

The permanent portfolio strategy has been proven to beat the market.
http://harrybrowne.org/PermanentPortfolioResults.htm
Sure, you can just imitate a strategy marketed as "bullet proof" or a "magic formula" or whatever, or you can understand WHY it works.
With an investment having a ZERO correlation, (but individual parts with negative correlations to other parts), it doesn't matter what day it is, you should have something that goes up and something that goes down. That means on ANY time frame, the same will be true. Of course, it's entirely possible the correlations shift, but for the time being it seems that it is such that
The most simple portfolio that can have a very close to zero correlation, is the following:

Equities (EEM)
Treasury Bonds (TLT)
Gold (GLD)
Oil (USO)
Dollar (UUP)

Rather than own the dollar, you instead might wish to actually own cash. If you own cash, the correlation actually goes slightly positive and oil can be taken out and sub in SPY for EEM.

SPY(IVV works too),TLT,GLD is really all you need if you want the minimum work required in the portfolio. Add in SHY if you want the short term yield or perhaps put the cash in a 1 year CD spread out on the 25th day of each month. (Or even a 1 yr Bond). That way after a year every month you will receive cash from which you can put to work to rebalance along with your monthly deposit savings in the account, and if interest rates go up, the interest accumulated on the CDs will go up. You are dollar cost averaging into the interest rate so if you get a better value later it is a superior strategy than putting it all in a CD now, and you still get the compounding each year.


The point I am pointing this out is to show you that if you are low funded you can greatly reduce the amount of trades you have to put on, remain diversified, and have bets that will bennefit from the "synergy" of your portfolio.

Now if you can run commission free trades you can rebalance without fees, but with not much capital you may not be able to rebalance. At least with a DRIP (Dividend Re-Investment program) program (don't ask me why people say DRIP program using the work program twice) and fractional shares you effectively have the dollar cost averaging going on and perhaps can rebalance. So I would consider sharebuilder if this is your strategy. This knowledge still can work with trading, or more skilled "timing" of the investment aspect (some might call it longer term trading). It can apply to swing trading or position trading.

Correlations that have aspects of positive and negative correlations and sum out at zero protect you from being exposed to market risk in any direction and provides stability and profit.

When you are actually trading, you don't have to be using all of these at the same time. I personally believe timing is possible and will give this strategy an edge, and leverage will as well, but you better be sure you do have an edge and manage risk properly

Nevertheless, when the timing is right, you may want to accumulate shares on either a short term trade or long term trade in any of these names. It can either be entire positions or portions of your position and you can either time the sale or just gradually reduce on the "high points" or "overbought' areas.

One alternative is to combine trading and investing in the sense that you have these 4 ETFs or so make up a portion of your portfolio to provide the stability, and with say the other half of it, you consider your trading capital and base trades off of that.

Aside from zero correlation working... WHY does it work?
Basically, money is changing hands ALL of the time. Capital expands and contracts as well increasing or decreasing the value in dollars (or some form of currency somewhere in the world). The contraction phases are typically short and are offset by an even greater expansion phase. But as it exchanges hands and expands, it causes some areas to go up more than others. At times some areas go down and down more than others, and often one goes up as the other goes down. Think about if you sat at a table where cards exchanged hands. By  positioning everywhere, at every seat you are involved in EVERY transaction that takes place. You are skimming chips with every exchange of cards. Now it's just a question of skimming the profits when you notice the trade flows too aggressively into one asset class and neglects another, or pulling the best cards and switching them with your own until you position yourself to have the "strongest hand"

If you believe over LONGER periods of time, markets enter trend mode, you may wish to rebalance less frequently. If commissions cost you  and you have limited capital, rebalance less frequently.

Now I will discuss a gameplan of someone who might use this to their advantage with a slight bias that may shrink or grow in each asset.