How to Get a 62.9% One Year Return on Your ISA - Part 2 of 4
By Stephen Sutherland, author of Liquid Millionaire.Posted in the Category of ISAS, Investing, Stock Market, Wealth Building on 30th July, 2010.
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On Wednesday I told you about an interesting article that I recent read in a Financial Times Money Guide. It was an article written by Steve Lodge and began with the headline “Cautious managers fail to catch recovery in the markets.”
It highlighted the poor performance returns of thirty three wealth management companies and featured big heavyweight names like JP Morgan Private Bank, Cazenove Capital Management and Rothschild Private Banking and Trust.
The average annual return for 2009 on “equity risk” portfolios of the thirty plus companies was 21%.
So how did we at ISACO manage to clock up a 62.9% gain for 2009?
The answer lies in three key things.
1. Knowing which direction the market is likely to head.
2. Knowing how to find high quality investment funds.
3. Knowing when to buy and sell these funds at the most opportune times.
Let’s start with the first of the three.
Knowing which direction the market is likely to head.
One of the best ways of reading the market is to look at charts. A stock chart is a graph that displays the price and volume history of a given security or index over a period of days, months or even years.
Price and volume charts help you to see what the professionals are doing so that you can follow in their footsteps. Whether they are buying or selling, through a chart you can see what they are doing by simply looking at the price and volume action. Price action is how a stock or index changes in price. Volume action tells you the number of shares that have been traded.
For example, if volume is far above its average and the price action is up, the professionals are buying. On the other hand, if the volume is far above average and the price action is down, it means that the professionals are selling. Lack of volume combined with prices moving up indicates little demand from the professionals. This is viewed as unhealthy action.
Lack of volume combined with prices moving down means that the professionals are reluctant to sell. This type of action is viewed as healthy action. By watching the market every day, and keeping a close eye on price and volume action, you can determine exactly what the professionals are doing with their money so that you can do the same.
Below are four images. They show the difference between healthy price and volume action and unhealthy price and volume action.
Healthy Price and Volume Action
Unhealthy Price and Volume Action
It is also important for you to understand that it takes a lot of buying or selling to confirm that the trend of the market has changed.
For example, if the trend of the stock market is up, it takes a lot of selling to change the trend from up to down. By measuring how much selling is going on over certain time periods, you can determine when the trend is about to change or has changed and you can then act accordingly ie; switching some, or all of your holdings into a cash based fund such as the Fidelity ISA Cash Park.
Reading the market’s health gives you inside knowledge of future market direction and if the market’s health has become sickly, it tells you that if you stay invested, your investments have a high probability of dropping in value.
It is helpful to be aware that it’s impossible to time getting out at the very top of the market or getting in right at the very bottom.
To help me read stock market direction using price and volume, I like to use Daily Graphs which costs about £600 per year. However if you are on a budget, the best free resources are as follows:
StockCharts.com www.stockcharts.com
Yahoo Finance www.uk.finance.yahoo.com/
In next week’s two blogs, I’ll fully explain the other two key elements that went in how we managed to score 62.9% in 2009.
Those 2 elements are:
1. How to find high quality investment funds.
2. How and when to buy and sell at the most opportune times.
Until next my friend.
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