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Advantages
While the concept of swing trading the indexes using long and short leveraged ETFs is ridiculously straightforward (even boring), the strategic benefits of this simple strategy are profound and cannot be overstated.
Permanence / Endurance
Hot stocks come and go. I remember back when retail investors were obsessing over Crocs and Krispy Kreme. When’s the last your neighbor boasted about their CROX or KKR positions? (KKR isn’t even public anymore.) More recently it was pot stocks, anything to do with cryptocurrency, and 3D printing. Those too have been thrown out with yesterday’s trash. (ACB, RIOT, and DDD are all down 95% from their bubblicious highs) Today’s must-have stocks are video conferencing, telemedicine, and electric cars. Will they fare any better than their highflying predecessors? Only time will tell.
What comes next? Who knows, but it definitely takes a tremendous amount of skill, effort, and a mountain of luck to identify those critical tipping points before the inevitable crash annihilates the blissfully ignorant crowd’s portfolios. (Even superstars like AMZN plunged 95% following the dot-com bubble and NFLX shed 80% multiple times during its sensational climb.)
And it isn’t just knowing when to abandon ship, but also having the time to find and learn the next super-stock’s personality. All while trying to avoid getting burned by the numerous highflying imposters. Trading this way can be rewarding for those with the dedication and work ethic to follow it all the way through. Unfortunately, it makes me tired just thinking about all the mental gymnastics this approach requires year-in and year-out.
The wonderful thing about the S&P 500 is it will never go out of style. The S&P 500 is older than I am and it has never been more popular than it is today. And I have zero doubt it will continue to grow in popularity as the index investing revolution continues.
Only needing to learn one thing and then I’m set for the rest of my life. Yes, I’ll take that one, please!
Liquidity
Many of the hottest stocks are small. Like crazy small. That’s both a blessing and a curse. The smallest market caps have the greatest potential to explode higher exponentially. But what goes up fast typically comes down even faster. When the crowd panics and abandons ship simultaneously, there won’t be anyone left willing to buy your stock at a reasonable price.
On the other hand, the S&P 500 is far and away the most liquid equity-based security in the world. It doesn’t matter if you are a 20-year-old trading your first $100 or a billion-dollar hedge fund manager, you won’t have a liquidity problem moving in and out of the S&P 500. (If the S&P 500 has liquidity issues, the world is having a very, very bad day and humanity has bigger problems than stock portfolios.)
Specialization
If you dabble in a little bit of this (tech stocks) and a little bit of that (options), and maybe a sprinkle in something else (beaten-down stocks), you inevitably end up being very average at everything. Unfortunately, in the market, average is a very bad place to be since most people lose money.
You will always be more successful if you have a laser-like focus on one thing and you do that one thing better than everyone else. For many people, this little hack is the difference between developing into a successful trader and washing out broke.
(And as I alluded to above, if you are going to spend a lot of time becoming an expert in one thing, make sure that one thing will be around for a long, long time.)
Focused Effort
Minimize effort
Diversification
Only one thing to watch
It is often said that 50% of an individual stock’s performance comes from the broad market. And this makes sense intuitively. If the indexes go up, most stocks go up and if the indexes go down, most stocks go down.
For this reason, a successful trader starts every day by analyzing the indexes. If the indexes are in an up-trend, he looks for something to buy. If the indexes are in a down-trend, he looks for something to sell.
Bu if we have to analyze the market anyway, why not stop there and simply trade the index? That saves countless hours of research and time wasted sorting through hundreds of charts and chasing countless dead-end stocks.
Only one decision to make
A smart trader once said, “Holding a stock is the same thing as making the decision to buy it all over again.” The original context of this quote relates to holding a loser. (i.e. If you wouldn’t buy the stock at this level, you shouldn’t continue holding it.)
But this framework also makes sense when looking at the decisions a trader should be making every day. If I have 5 stocks, then every day I should be deciding if I would buy each of these stocks again today. If the answer is no for any of them, then it is time to sell. 5 stocks x 5 days = 25 decisions to hold or sell. 10 stocks x 5 days = 50 decisions.
Compare this to swing trading the indexes. One index. One decision.
Leverage
Minimal slippage
Not paying rent – ie options
Performance
Next —> Part IV: Comparing results
Index
Introduction
Part I: Genesis
Part II: Strategy
Part III: Advantages
Part IV: Comparing results <— Next
Part V: Downsides
Part VI: A well-designed portfolio
Part VII: Where to go next