The PCA for Windows Online Manual

PCA as a Risk Management Tool

 

Reduce Risk

In these recent times of high volatility and even higher historical market levels, PCA is a welcome strategy for managing risk. When initially starting a PCA portfolio, you will only commit a portion of the original portfolio value to the equity at the outset. Right away, this mitigates risk by not plunging into a stock with both feet.

The remaining portion of the portfolio will be set up as a cash reserve to fund additional purchases should the price decline. The interest generated by the cash portion of the portfolio usually more than covers the commissions on trades.

Since the PCA system tends to buy shares at a slightly faster rate that it sells, you are "strategically" deploying your cash into the investment over time and are assured a lower cost per share than buying lump-sum at the beginning.

As PCA makes trades around the core position in a stock, the cash reserve fluctuates. At some points, the cash may dwindle and even run out. This would tend to be near the bottom of the cycle, as incremental shares were accumulated on the way down.

Conversely, on big run-ups in price, PCA will lock in some profits and turn them to cash for the reserve. This cash will be re-deployed in the stock on pullbacks, thus the compounding effect.

You can see the average amount of money you have at risk as a display on the Equity manager of the PCA software. A quick glance at this figure will help you see how much of the portfolio is actually at risk in the stock.

Having the cash reserve serves well to reduce the overall risk of the portfolio, though some amount of gains may be foregone. Fortunately, PCA allows you the flexibility to determine the amount of cash reserve you feel comfortable with.

You can always add more cash is required. In some cases, a rising stock will fund the cash reserve for you, and you don't really have to have the cash on hand. Be careful though. If you don't have any cash in the reserve, PCA will not signal any buying advice on a falling stock.

Locking in profits

Astute investors realize that the stock market has seen some unprecedented historic valuations. The PCA investor has used this bull market to systematically lighten up on his exposure, and now can take satisfaction in the fact that should the market trend toward more the mean in terms of valuation, his capital at risk has been trimmed back and profits have been taken.

The system was originally intended to be used over many market cycles as a long-term portfolio strategy. The strategy of locking in incremental profits will insure that cash is available to re-invest if and when prices fall. PCA has a tendency to buy at a slightly faster rate than it will sell. Under most circumstances, it takes less of a drop to signal a trade than it does a rise to signal a sell.

In essence, PCA is strategically deploying the cash reserve into the stock incrementally, and will self-adjust as it goes.

Save Time

Using the PCA system to manage stocks requires less than an hour a week leaving you free for other things if you wish. One of the ways to utilize the PCA system is to pick a certain time each week to update your stock prices, say Thursday evening after the close. Plug in your prices and see if any trade advice is given. You can then place orders to be executed the next day. Each time you sit down to update your prices, current (delayed) quotes are just a click away.

Of course you can always monitor your PCA investments daily if you choose. You can choose your own level of participation and monitor your investments as you see fit. A lot will depend on the stocks you use in the system. The more volatile a stock is, the closer you will want to monitor it.

 

 

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