The 20-60-20 Rule

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INTRODUCTION It's called the "20-60-20" rule but it could also be called the "play it safe and don't be greedy" rule. It's not a rule many options experts would cite in explaining their system. But our own options specialist, Ted Peroulakis, isn't your normal options trader. Ted is old-fashioned in many ways. He studies charts like a Talmudic scholar, searching for their secrets. But he doesn't go crazy over them. While they have their place, Ted focuses in on the "big picture." He says, "Once I've identified a macro longer-term trend, I'll trade around it." And what guides him in navigating these long-term trends and selecting option plays? The "20-60-20" rule. It allows you and Ted to avoid doing the impossible, which is calling tops and bottoms. The most destructive trading principle that far too many people have glommed on to is this: Find the bottom and ride an asset to the top. Like that's real easy to do... If Ted, one of the best options players I know, can't do it consistently, what chances do you have? They're not very good. Ted does something which isn't so hard to do... "I like to jump in when a trend is developing so my readers can ride the wave and take gains as the momentum continues. And I like to exit before the momentum slows down." Well, that's about as good an introduction to the rule you're about to read as it gets. Ted's a believer. That rule just got him a streak of 12-straight options winners. Many of them gave out 100% or more profits. But you don't have to play options to take advantage of this rule. It also helps improve immensely the profit regular no-frills stock investors make. And we have the proof below... The 20-60-20 Rule As an investment strategy, "buy and hold" doesn't work... for one simple reason. Gravity. Eventually, rising stocks fall back to earth. And your returns fall with them. With your assets rapidly dwindling... You panic and sell your stocks while they're bottoming – a guaranteed way to lose your money. Or you run out of time. Bull markets can be separated by more than a decade of flatlining or falling. If that happens when you're approaching or already in retirement... well, you're out of luck. Studies shows that the "own 'em and hold 'em" crowd loses about 50% of what they make between bull markets. The math ain't pretty. If you lose 50% in a falling market, the next bull has to go up 100% for you to make your money back – something you can't count on. And that is the fatal flaw of "buy and hold" investing. Wall Street brokers push this strategy because then they get to play with your money indefinitely. Bailing on the market would mean bailing on them. They don't like that. So they're okay with exposing you to big losses. But "hanging in there" can backfire on you big time. Look what happened to my neighbor Denise... She bought Jones Soda back in 2005. Good timing. It was right before the stock became a media darling. The company was trading around $5.50 a share. The stock then began its meteoric rise and hit just over $30 a share in April 2007. Denise was sitting on a huge profit in less than two years. She should have cashed out. Instead, she held on for dear life, even as the stock began falling (for various reasons). When it dropped below $0.60 a share, poor Denise took a 92% loss. "Buy and hold" is not and never was a safe investment strategy. It appeared to work only when you could count on companies like Ma Bell and GE going up 1-3% year after year. But Ma Bell is long gone. And GE was one of the bigger crashers in a market full of them.  At IDE we have a better strategy for you. We call it the 20-60-20 rule. It gets you into an investment after the first 20% rise and gets you out when it drops 20%. You keep the middle 60%. This simple rule helps you stay on the profitable side of the ledger while immensely reducing your odds of taking a loss. It sure would have helped Denise. She could have pocketed a 2,400% profit. All she had to do was stay within the blue lines and grab the middle 60% of the profit the rule hands to you, investment after investment... And if Denise had wanted to dip back into this very same stock, she could have... on December 27, 2006, when it once again went up by 20%, This time around, she would have made a 60% profit How about one more go-around? The stock took its next 20% jump soon after it bottomed on September 11. Denise's entry price would have been $9.03. The following May, it dipped 20%. Using the 20-60-20 rule, she would have sold at $19.23. In less than a year, Denise would have bagged a profit of 113%. Most importantly, Denise would have missed the stock's entire crash, apart from that first 20% drop it made in April through May of 2007. Let's talk about oil... If you were following the 20-60-20 rule, you would have entered the market in May 2007. From bottoming at under $55 in January, oil rose 20% to $65 in May. Topping at over $145 in August 2008, you'd have sold at around $115 for a 75% profit – AND, you would have avoided the crash that followed. The 20-60-20 rule would have worked for the uranium market too. It began a multi-year surge in 2005 when it was going for around $20 a pound. If you had listened to the so-called experts at the time, you would have thought uranium was overpriced when it reached $50. And if you had gotten out then, you would have missed the "other" yellow metal rising to nearly $140, nearly tripling in price. You still would have made 100%. Not bad. But following the 20-60-20 rule, you could have sold your uranium investment at $112. And your gain – with remarkably little risk – would have been 360%. Uranium Gushed Nearly Seven-Fold in 2.5 Years In addition to metals and stocks, you can use the 20-60-20 rule to invest in countries or regions, too (typically through ETFs). Again, you leave the guesswork behind. The Asia markets, for example, began going up in April of 2003 and peaked at $160 toward the end of 2008. The 20-60-20 rule would have given you a safe profit of 60%. Here's one more example – the U.S. real estate market... Same routine... you get in when it's up 20% and you get out when it goes down 20%. During the time frame illustrated by the above chart, you would have made a clean 55%. And, let's not forget... you would have missed the ugly crash that hit the real estate market beginning in 2008. It's easy to follow the 20-60-20 rule and rake in safe (often quite substantial) profits. You limit your losses... always. And by not losing money and letting your profits ride, you get to amass big gains over the long haul. With "buy and hold," you're at the mercy of the market, always one plunge away from heartbreaking losses. The 20-60-20 rule puts you in the driver's seat.   The Perfect Discovery at Just the Right Time What is the "silver striker"?     How can it sustain China's unquenchable thirst for resources? And make a tiny American mining company $514 billion richer?  What's the best way for you to play it for potential quadruple-digit gains?   Wall Streeters will be kicking themselves over this one.  Read Bob Irish's detailed report here.   FINANCIAL ADVISORY BOARD Bob Irish - Investment Director Andy Gordon - Editor Jon Herring - Editorial Contributor Ted Peroulakis - Editorial Contributor Christian Hill - Managing Editor Dr. Russell McDougal - Editorial Contributor Steve McDonald - Editorial Contributor Michael Masterson - Consulting Editor

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