The votes are in – Obama wins.
To keep eyes on the screen, the mainstream media would have you believe the election was much closer than the actual result.
What people don’t realize is that the election was over long ago. Just look at the probabilities. For months professional statisticians have stated Obama’s inevitable win. Yet for some reason people want to ignore the stats.
Believe me, I understand the rationale. When the odds are stacked against you, you feel obligated to grasp on to that small glimmer of hope. In Romney’s case, it was 10-20%.
And if you’re a regular investor, the bad news is that your odds of success aren’t much better …
That’s because in an efficient, random market you can't predict with consistent accuracy the fate of an investment. Yes, I know, I know, you might have a guru that says he can beat the market and hey, maybe he can over the short to intermediate term.
But over the long term, only a few lucky ones can achieve such greatness. The probability just isn't there. Remember, picking stocks is equivalent to a coin toss. You have only a 50/50 chance of success. And to have three successful investments in succession, well, the statistics say the chances of that occurring are the following:
As you can see the probability isn’t very good …12.5%. But I digress.
Diversification doesn’t change your probability of success either. In fact, I would argue that traditional diversification doesn’t factor in the relative risk between assets like bonds and stocks.
That’s why you want to diversify across various time frames, strategies and markets. Diversifying trades over various time frames using risk-defined strategies like my low-risk options strategy allows you to make money WITH probabilities.
Moreover, if you use this options strategy, you have the ability to diversify or define risk across more products because less capital is required to make the same return.
And more importantly, monitoring and managing your portfolio through risk-weighting (which I will discuss more in the near future) will assist you in a more accurate assessment of your overall portfolio risk.
If you are interested in how I use probabilities for my own investing please take the time to watch my webinar, “How I Collect Monthly Income Using the S&P ETF.”
And as always, if you have any questions please feel free to email at [email protected].
Editor and Chief Options Strategist