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Asset allocation: 
Booking the DISTANCE, the biggest mistake you will make.
If KO trades in a 52 week range of $53.50-38.30, will buying the stock at $38.30 and selling it at $53.50 result in a higher ROI for your overall portfolio? 

Did you know a research study done in 1991, has shown that money management explained 91.5% of the returns earned by money managers over a ten year period?  In my own research I have found that position sizing plays a much larger role than the actual price paid and received for the stock. In other words, the percentage of your capital in each specific position will have a much larger impact on your portfolio, than the actual timing of your buys, and sells.

This is a difficult concept to grasp for the average investor, as we are all trained to focus on booking the DISTANCE, which is the difference between the actual buy price to the actual sell price. What most investors miss is the time factor and the opportunity cost, or asset allocation conflict.  When your money is being held in a position in the "market's waiting room", waiting to make it to $53.50, what is your opportunity cost?  How much are you losing while your capital is tied up in KO waiting to be recognized as a good value at $53.50, and would your money be better off used in another position? 

Asset Allocation Conflict:  Think of your stock portfolio as products being assembled on an assembly line.  You have 20 stocks on line being worked on, but in looking at your system there are 10 more being shipped to you.  You are screaming at your employees to work faster, but there is not much they can do to speed up the process.  You are really upset as the 10 new stocks have arrived at your door, and now your only choice is to either pass on the new ones, or sell the old ones before they are ready.  Get the idea of Asset Allocation Conflict?

 

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