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There is no way on earth you could ever beat the market if the stocks you hold are not keeping up with the market. And hopefully, staying ahead of the market.
But yet, that's what lots of people try to do. They'd rather keep all the dogs in their account and maybe “take a flyer” on one stock, hoping for a miracle. It's like trying to win a NASCAR race with your Ford Taurus. It just ain't gonna happen.
But hey, maybe you don't want to beat the market overall. Maybe you just want to own the BEST semiconductor stocks, or the best retailers, or the best utilities.
Seriously, how would you even KNOW if your stocks or mutual funds are beating the market, or are the best names to own in their group? Well, I can tell you this...
the best indicator I've ever seen in twenty-plus years in the business has been relative strength.
What is relative strength? It is simply the measure of how your mutual fund or stock is doing, compared to a group of other stocks, funds or indexes...or the market overall.
Perhaps you want to compare Intel with other semiconductor stocks. Maybe you want to compare Microsoft with the S&P 500 Index. Maybe you want to compare your mutual fund against the Dow Jones Industrial Average or the Standard & Poor's 500 Index.
This is a very easy calculation. Here is how you do it: Simply divide the price of your stock or mutual fund against whatever yardstick you choose. You'll get a fractional number as the result. But slide the decimal over so you can work with whole numbers. Then we begin plotting that result daily on a point & figure chart.
These relative strength charts move much slower than a typical chart. Anything going up over time will be in a column of X's. Anything going down will be in a column of O's. If you want to significantly improve your chances of beating the market, the index (or whatever yardstick you choose), it MUST be in a column of X's and preferably be giving buy signals.
Why is this so? Well, if your stock or mutual fund is climbing in a column of X's against the market (or a group of its peers), it HAS to be outperforming the yardstick, right? It cannot go higher unless it is rising faster than the market overall.
Now, if your stock or mutual fund is going down against the yardstick you are using, it means your stock or mutual fund has poor relative strength compared to the index you are plotting it against.
Poor relative strength is something to be avoided.
Here's why: When the market starts falling apart and things look bad, stocks and mutual funds with poor relative strength (or on a relative strength SELL signal) will usually fall further, faster than the rest of the market.
Now, stocks on a relative strength BUY signal can also fall with the market. But our experience has shown that stocks with good relative strength (or on relative strength buy signals) usually don't fall as far as the market overall. They are also are the first names to bounce when the market recovers.
On top of that, the top stock pickers and fund managers can't beat that number consistently for anywhere near as long. Oh they get a few stellar years, but over time, they do well to hit the average. This is also true for active traders, especially when considering trading costs plus taxes on short term activity.
So if the pros can't do it, how can I make this claim of an 18% return on your money?
It's simple. I'm talking about the thing you should do before ever putting a nickel in the market.
The odd thing is there are millions who don't do this and keep throwing away money year after year, while maintaining the illusion they've got their money working hard for them.
What is this simple step? Paying off credit card balances.
If you carry a balance on your credit card(s), you pay a certain rate of interest along with that principal payment every month. On average, that rate is 18%. Hence paying off the balance eliminates paying 18%, thus giving you an 18% return.
No, this isn't hocus-pocus, and it's no trifling matter. It's real money in your pocket.
People tend to focus on how well their investments are performing while ignoring the ridiculous amounts of interest they pay during their lifetime of credit card debt.
The simple fact is, that if you aren't earning more on borrowed money (debt) than you pay in interest, you are by definition, losing ground.
Millions of folks do this every day without even thinking about it. I'm not even referring to those investors who play the market regularly, yet keep a balance on their cards. I'd expect them to know better since they live and breathe ROI. Rather I'm speaking about those diligent earners funding their various retirement plans in the form of 401k's, 403b's, IRA's, whatever.
They watch with concern at how much their nest egg grows, which we've already seen will likely average around 10% over time. Yet they always have a balance on their credit cards that they just as diligently pay on month after month.
If their interest rate is 18%, and their investments make them 10%, they're really losing 8% each year. That's assuming the market isn't tanking like it's been recently. With today's volatility, you could actually be down 10% or more. Add that to paying 18%, and hmm – that's a 28% loss.
Something else to be aware of – it takes a 50% gain to wipe out a 25% loss!
Even if you have a low rate on your cards, anything over the average 10% return, will still lose you money over time. Do the smart thing – use credit cards only for convenience, and pay them off every month. Your investments will thank you.