How can you tell a bearish trend? The answer is simple, if your risk-weighted assets are higher, you are a bear. Conversely, if risk-weighted assets are lower — or, the market is lower than your asset allocation — you are a bullish.
Let’s say that your asset allocation is 20 percent risk-weighted stocks. You invest in S&P 500 companies. Say that the market is 50% overvalued at current levels and then you decide to go ahead and reinvest $7,000 at a later date. At the current equity prices, you are a bear. If the market were to go below the cost of reinvesting your money, you would be a bull. So how do you know that you are a bear?
To determine your odds of being a bear in a given financial market, look around the room. The bear market is usually the time we are talking about, and our stocks should be down by more than 15%, and therefore you are a bear. The bull market is generally when we are talking about, and our stocks should be up by less than 10% right at the time. So your odds of being a bull in a given market are higher than that in a bear market.
This is a very fundamental rule of investing. It is not only the number of points above the cost of funds that you need to look for, but also how much is left in the portfolio. There are lots of investors that have great track records, but don’t follow their own advice and are still not long-term winners. Those would only be considered short-term winners who would have invested 20 years ago and would not be winning now. There are also many investors who have beaten the market for years, but would get hammered from time to time by some economic shock. They would still be long term winners, but would do so in a way that makes more sense over a longer term. The fact remains, that you will not find them and you would be foolish to invest with them.
The good news is, a good number of investors understand that they are a bear if their risk-weighted assets are higher, and this is reflected in many of the best long-term trading systems out there. The good news here is that many of these systems are not just about investing, but also about managing risk. What is involved is a risk management system where you are dealing with a risk that does not have an easy answer. For the moment, we will just