The 12% Solution : Book Review

 

Book Review #18

I just finished reading a very short and interesting book called "The 12% Solution" that promises to help individual investors with a long-term systematic investment strategy that can consistently beat market and prevent big losses during market correction.

The author, David Alan Carter says this book is for you if
- You are afraid of a major market correction because you have already seen at least one major market correction
- You purchased one too many “hot” stocks touted by influencers/TV gurus only to blow up your hard-earned money
- You tried mutual fund investing but your returns always lag the S&P 500

So, let me quickly summarize the essence of this investing approach for you.

1) Momentum investing and rotation are at the core of this rules-based investing approach. Decades of data confirms that momentum investing holds that trends can persist for some time, and it’s possible to profit by staying with a trend until its conclusion

2) The best way to make money is to not lose it. In other words, the ultimate success of any investment plan depends on one simple element: minimizing losses

3) Every month, few trades will be done at the end of the month (last trading day). For this your investment corpus will be allocated in a 60:40 ratio across a mix of equity and bond funds. A 3-month lookback period is defined as the optimal history for determining which ETFs to rotate the money across, and only monthly trades are advised to screen out market noise

4) The 60% on Equity is the "risk-on" part of the investment. At the end of every month, the ETFs for our risk-on trade are - SPY (S&P 500 ETF), MDY (Mid-cap 400 ETF), QQQ (Nasdaq-100 Index™ and features Apple, Google, Microsoft etc.), and IWM (US Equity small cap). At the end of every month, you review the 3-month trend of these four and move your equity component to the one that is showing the best trend in the last 3 months. And if all of them are showing negative returns then you move the equity component to cash or the cash-equivalent ETF (1-3 Year Treasury Bonds). This is called the cash trigger

5) The 40% on Bonds is the "hedge" part of the investment. At the end of every month, the ETFs for our hedge trade are - JNK (SPDR High Yield Bond ETF) and TLT (20 Plus Year Treasury Bond ETF). As with the equity part you reallocate your hedge component to either JNK or TLT.

6) The only other trade that remains is to do the trade that will rebalance and ensure that you maintain the 60/40 mix of risk-on and hedge investments. After this do not let the daily market noise lure you to do anything

The author has put up his results on the website https://lnkd.in/g_sXW8ZH and the results are for us to see (see pic 2 attached). Definitely the approach beats the S&P 500 and for most investors who cannot actively trade and time the market it seems to be a very effective method.

Thanks Stephen Christopher, MD for the book recommendation.

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