9Richard: This allows LSP to put the focus on capital preservation and drawdown management. Ralph: Right, the strategy is designed to make "dynamic quantity allocations" in regards to the dollars being invested. An investor can't control the marketplace and can't outguess it, either. What can be controlled is how much money is put to risk.Richard: Picture it as whether you're going to buy five shares of a stock or 5,000 shares. It's your decision. You want to buy in, but for some people, "buying in" has a different meaning altogether. Or to use a more colloquial example, are you going to put $5 at the roulette table or $5,000. That's what you control, not whether the ball will land on black or red.Ralph: As Richard says, the indexes aren't fully invested to begin with. That's not very common in investing. By holding onto money, right off the bat we're breaking with investment orthodoxy. Richard: That's absolutely correct. You expect that if a fund manager has $1 million, he or she will buy $1 million worth of stock. LSP mandates that you initially use less than $500,000. The rest is for later use. It's extremely counterintuitive. It goes against a lot of people's thinking. Ralph: The LSP formula, which underlies the model behind the Dow Jones LSP Indexes, is unchangeable. It mandates that there be unused cash. That actually gives us a lot of freedom to act when necessary. For instance, if the market becomes more attractive, then the cash reserves come into play in a predetermined progression. Conversely, if the market goes up, the rules dictate that cash positions are increased.Richard: We always say that the beauty of our LSP strategy is that it's rules-based. Ralph: Yeah, I think we already said that. (laughs)Richard: (laughs) I wouldn't doubt it. It's the heart of the overlay strategy. It eliminates the human factor and all its biases and pre-conceived notions. It's simply an algorithm to determine quantity through time. LSP is very dynamic. It allows for positions to be adjusted, or trades to be made, in every possible scenario, whether the market's going up or down. It's not a trading system.Ralph: The fact is that LSP adapts really well to market conditions. The reason that people are drawn to these indexes is that they have risk control built in. After so much carnage in 2008 and 2009, people want to know that we have volatility in mind.Richard: Actually, the strategy works well with volatility. You see, our model reacts to upward or downward movement by adjusting the size of the cash position. Since we can't predict volatility, we made sure that LSP would be able to take advantage of it in both bull and bear markets. It's meant to be so dynamic that it'll work in any market situation.Ralph: It's like building a ship: You need it to be the strongest possible model so that it can weather any storm. You can't know if there's going to be bad weather or blazing heat, but you can be primed for both. LSP prepares you for any development. You're never wishing, "If only I had more capital, I'd be able to go long or short on a position." LSP gives you that ability.Richard: If you were 100% invested, there'd be no room to maneuver. In fact, when we meet with people all over the country, such as ETF providers, we tell them that they're probably over-invested. "The fact is that LSP adapts really well to market conditions. The reason that people are drawn to these indexes is that they have risk control built in. After so much carnage in 2008 and 2009, people want to know that we have volatility in mind."
10Ralph: That's true. What's more, LSP is made to compound gains. Every time it makes any kind of profit, it gets banked and is ready to be redeployed. So at the next reinvestment, you have a bigger pie that you're buying into. This is the reason that an LSP portfolio outperforms during both bull markets and bear markets.Richard: Keep in mind that this is more than buy-and-hold. And it's not over-trading either. It's a truly objective means of managing any basket of stocks using nothing but mathematical formulae.Ralph: One more thing it's not and that's dollar cost averaging. It's "keeping your powder dry," to use the old expression. It's the incremental readjustment of the positions in order to increase your capital. Richard: The people who are most likely to gain from the strategy are conservative and passive investors and institutions that are looking for capital preservation and consistent return to new high equity. That's what LSP is all about. It's really a one-of-a-kind, long-term strategy for long-term investors.Ralph: I have to say that I agree with you on that too. (laughs) LSP is really distinctive in the way that it keeps a reserve that allows investors to increase the returns on any portfolio of stocks, globally. And who wouldn't want to add basis points to their return simply by using LSP to manage the quantity? It's a lot of fun to tell financial professionals that they should rethink everything, and here's the proof!For more information on the Dow Jones LSP Position Sizing IndexesSM, visit: >> www.djindexes.com/positionsizingRalph Vince and Richard Wilkie of LSP Partners, LLC, discuss risk-based strategy behind the Dow Jones LSP Position Sizing IndexesSM.Visit www.djindexes.com/video/insights/PositionSizing to view the video."The people who are most likely to gain from the strategy are conservative and passive investors and institutions that are looking for capital preservation and consistent return to new high equity. That's what LSP is all about."