Futures markets can be used to double your money every year—but within the context of a conservative strategy designed for capital preservation first and profit second.
The first objective of any investment strategy designed to deal with today's inflationary world must be to conserve capital. This means placing the bulk of one's portfolio in assets that will retain their purchasing power over the longterm. This means gold, silver and other precious metals, and Swiss francs. These core holdings, which should account for 25 to 50 percent of one's total portfolio, are designed to be held until the end of the monetary crisis.
It is also possible, even desirable, to trade in a variety of commodities to increase one's overall purchasing power. When one can buy the physical commodity (for example, gold, silver, or stocks and bonds), provided one buys with the correct timing, trading long-term and intermediate-term cycles, one comes as close as is possible to the elusive "risk-free" investment.
Long-term purchases are made at the beginning of a bull market in a commodity or stock. Such a bull market usually lasts around two and a half years, so purchases made in this category don't need much attention for some time. While you're sitting on them, they're appreciating nicely because of the bull market.
Intermediate-term purchases are made with a much shorter time horizon. Gold, while in its bull market that began at $103 per ounce, has moved in intermediate cycles within that long-term trend. For example, gold fell from $246 per ounce to $193 last November in an intermediate correction. Intermediate traders of gold would have sold at over $240 and bought back when it dropped under $200. Long-term traders would have sat through the moves, both up and down.
Clearly, the shorter the time horizon, the greater is the risk involved and the attention that must be given to one's holdings. By the same token, the potential rewards are commensurately greater. Riskiest of all, with the highest potential rewards (and losses) is, of course, futures trading.
The trick is to construct a portfolio that is centered around capital preservation but still has sufficient flexibility to take advantage of the high-risk high-profit opportunities. Obviously, the bulk of one's assets (at least 85 percent), should be in low-risk investments. One's assets might then be divided as follows:
• Core holdings (precious metals and Swiss francs to be held for the duration of the monetary crisis): 25-50 percent.
• Long-term trading (physical gold purchased at under $125, silver at under $5 per ounce, and other precious metals to be held for the duration of the current bull market): 25-50 percent.
The two above categories should account for 75 percent of one's total portfolio. Thus, three-quarters of one's total investments are earmarked for long-term capital preservation. Of the remaining quarter, 10-15 percent should go into intermediate-term trading; the remainder, with a maximum of 15 percent of the total, into futures markets.
With this division of assets, only 15 percent of one's wealth is exposed to serious risk; 75 percent is in very safe, sound, secure and low-risk areas; and that portion earmarked for intermediate-term trading is exposed to moderate risk. Following such a conservative strategy, it is still possible to double your money every year.
With carefully chosen futures contracts, it is possible to benefit from the wide fluctuations that inflation induces into all markets. Pinpointing movements of sufficient breadth to give a relatively safe and highly profitable trading spread opens up opportunities with, in the context of futures markets, relatively low risk. Nothing in futures markets is "risk-free," however. The substantial profits that are possible come from the leverage in futures trading. With just $1,000, you might control 25,000 pounds of copper worth over $18,000. Then, for every cent the price of copper rose you could gain $250; for every cent that it fell you could lose the same amount. The high profits that are possible lead many people to get carried away, with the result that they lose much more than they can afford. But following a few rules can minimize risk and maximize profits.
• Don't put all your eggs in one basket. Put a maximum of 15 percent of your portfolio into futures contracts—and only put half of that into any one commodity.
• Limit your losses. Always use a stop-loss in case the market runs in the direction opposite to that anticipated. The advantage is that you know what your maximum loss will be in advance. If you can't afford that loss, you shouldn't be in the market.
• Don't be greedy. The temptation is to stay in the market for an even greater rise than the one already experienced. If you bought a contract at 71c and sold it at 74c, then saw the price rise to 76c, don't regret it. The chances are that you wouldn't have sold at 76c. You'd have thought maybe it will go to 77c. Or 78c. You'd have hung on until the price dropped back to 74c—or lower.
• Lock in your profits. A stop-loss can be issued in reverse: to lock in your profits. It saves you from worrying too much about what's happening to the contract.
• Extra liquidity. If you only need to deposit $1,000 as margin, deposit $2,000, or have the additional money available in some liquid instrument such as short-term bills that pay interest. This reduces your return on funds invested, but it also gives you greater security and prevents you from overextending yourself.
• Salt away some of your profits. Don't reinvest everything. One of your aims is to make money; another one is to keep what you've made! When you make a dollar, keep half and only risk the other half. Next time around, if you lose, you're still 50 cents ahead.
If the 15 percent of your portfolio devoted to futures increases at 40 percent a month and the remaining 85 percent of your investments increase by 15 percent over the year, your total portfolio would have increased in value by 102 percent! And because of the way commodity markets are behaving, 1979 looks like a good year for an average monthly return of 40 percent on futures. Whether you make that depends, of course, on a number of factors—what futures are selected, how comfortable you are trading futures, to what extent you have access to such markets, and so on. But 1979 can be a prosperous year.