The thrill of making money in the stock market is short-lived if an investor doesn’t have a plan to protect their gains. All too often, investors cheer their paper returns, only to find out later, the money they made evaporates on the next drawdown.
Considering the advancements we are seeing within the tech sector, discussions around how to maximize exposure in tech while better managing the downside are more necessary than ever. Our mission is to solve this dilemma, which we consider to be the billion-dollar question – how to safely participate in tech. We feel strongly that this question has not been answered and is widely ignored within the retail world.
The below methods are how we manage risk in an all-tech portfolio. We are not financial advisors, rather we transparently disclose our buys/sells in various positions and provide the risk management tools that we use in our own portfolio. Please refer to our Terms and Conditions here.
The I/O Fund works hard to provide retail investors with tools to manage risk. Five years ago, our site pioneered offering real-time trade alerts, an actively managed portfolio including broad market webinars, and more recently, we released a hedging plan in 2022. Below are three tools that allow our Members to become acquainted with how we reduce risk, which has led to proven outperformance since our inception.
Risk Management Tool #1: Real-time trade alerts
All of our buys, sells, trims and adds are disclosed in real-time via text messages and through email alerts. This multi-dimensional approach is unparalleled among research sites, yet is extremely effective. For example, we sent real-time trade alerts when we were buying Nvidia in October of 2022 at $10.85 for gains that greatly outperformed a buy-and-hold strategy. We also sent trade alerts when we were selling Bitcoin in the $58K range, and then subsequently sent buy alerts when we bought back in the $16K to $18K range.
To put it simply:
- When you see sell or trim alerts, it’s because we are deeming the risk too high to enter or add to the position.
- When you see buy or add alerts, we believe it is good timing to create a bigger position.
Tech is especially sensitive to the broad market, thus, often times when we buy or sell, it has very little to do with the stock itself. Many of our readers simply use our trade alerts as additional information to understand if the market is risk-on or risk-off, in addition to being offered valuable (and rare) information on whether we are currently building a position or waiting for a better opportunity.
Portfolio Management and How to Read Our Trade Alerts
On Cash – We are an all-tech portfolio that leans into hedging to manage risk. We also will raise cash when we believe the market and economic environment support this. For example, we had between 0 – 10% cash in late 2020 – 2021 and have held between 5% to as high as 45% cash from 2023 through the end of 2024.
While we will, at times, mention in our weekly webinars where we are in terms of cash and margin, we do not list our cash position as part of our posted portfolio. The reason for this is because we are not financial advisors and so cannot and do not want to take on the role of managing others’ money indirectly. How one holds cash is based on their personal risk profile, which is based on a host of factors unique to that individual. What may be appropriate for us may not be appropriate for someone in their early 20s or in retirement. Instead, we provide our broad risk analysis and hedging, which is derived from technical analysis and quant signals. We also provide weekly broad market webinars to discuss risk in the markets. It is up to every individual investor on how to best use this information, or not.
How to read SMS alerts – We invest with our own capital. All the trade notifications that we send out are first discussed well in advance in our weekly webinars. We provide the buy zones and sell zones, which readers can use for their own investment strategies. Once we hit a buy zone, and we have determined that we want to own that stock, we execute a position and send that information out to our readers.
When a trade alert says “Bought XYZ at $30.36 – 3% Added” we are saying that we bought XYZ at the price listed and the amount we added is based on 3% of our total portfolio’s value.
For example, if we have a portfolio $1000, and $200 (20% cash) is in cash while $800 is invested (80% invested), the above example will buy $30 of XYZ (3% of the total, including cash). All buy alerts and sell alerts include cash, so we are basing the percentages on the total value of our portfolio.
How to Read the Pie Chart – As stated above, each trade alert is what we are doing with our own money. The I/O Fund is a live portfolio with the portfolio going live in May of 2020 and gets audited annually (our research site went live in July of 2019). Considering that we do not provide cash holdings, what the pie chart is showing is the percentage allocation of our invested portfolio. The positions with the highest percentage allocation constitute our highest convictions at the time.
For our newest Members, our allocations quickly and easily reveal which positions we have the most money in today; and subsequently, which stocks have our highest convictions. Our newest Members should look into our current allocations on the pie chart in order of highest percentage, and then search for the research and read the deep dives that correspond to those stocks for faster onboarding.
Risk Management Tool #2: Actively Managed Portfolio & Webinars
The I/O Fund does not believe in buy and hold approach for tech investing. The difference between an actively managed portfolio and a buy-and-hold strategy is quite visible in our cumulative returns, which have a 157% spread between our approach and popular tech ETFs, as of the start of 2024. Our next audited results will be out in March of 2025, and we foresee those results supporting our consistent trend of outperformance.
The reason that we approach investing from an active stance is due to the nature of losses. Investment losses are geometric. For example:
- If a portfolio or position goes down 50%, it has to go up 100% to breakeven.
- If a portfolio or position goes down 80%, it has to go up 400% to breakeven.
Tech is highly susciptible to large drawdowns – consider that popular stocks, such as Tesla, was down 60% in 2023 and Nvidia was down 60% in 2022.
Active management means you have a plan for your stock positions. The I/O Fund favors technicals analysis for our active management as the tech industry responds well to sentiment.
Knox Ridley, Portfolio Manager, discuss the I/O Fund’s plans for actively managing the portfolio weekly on Thursdays at 1:30 PST (4:30 pm EST).
Here are a few things you can expect to hear in the weekly webinars:
1) Technical Analysis – For those new to this field, please reference our “Resources.” Here you’ll see an entire section dedicated to basic concepts in technical analysis, plus an overview of Elliott Wave analysis.
The study of technical analysis is the study of the herd (or large group) sentiment. It has been well documented that people retain their individuality and rational thought process in small groups. However, when the group grows, at some point, a new consciousness takes over, which has been deamed the herd mentality. Individual I.Q.s drop, as this new herd mentality becomes the driving force of individuals.
While the specifics always change, human emotions and herd mentality does not. Because of this, we tend to see repeatable and predictable price patterns show up time and time again. Understanding what potential pattern is in play can help you get ahead of the herd’s next move. We use the below techniques to identify good risk/reward entries and stops for our hedges.
Critical Support and Resistance – While markets move in patterns, being able to identify the pattern not only allows you to project with accuracy where the market is going, but it also allows you to establish moving support or resistance levels that confirms the pattern in play or negates it.
For example, the stock below appeared to be in a 5 wave uptrend off the April 2020 low. Knowing that 4th waves tend to correct to the 23.6% – 38.2% retrace of the 3rd wave, this stock should have held $266. When it did not, this was a warning that the final 5th wave is not likely to happen, and that a pivot is needed.
With the broad market, just like all markets and stocks, the pattern that the trend is taking allows for corrections that have to hold certain levels. If those levels break, then you will see us begin to hedge our positions.
Do We Have a Downside Setup? All corrections, whether they are multi-year bear markets or quick moves in a day, are 3 wave patterns. There is the A wave down, the B wave up, which tends to make a lower high, followed by the most devastating part of the correction, which is the C wave down. The C wave is always a 5 wave pattern.
These patterns are fractal, so a small 5 wave pattern turns into a larger one, until you reach your target. So, if we know C waves are 5 wave patterns, this is crucial information for missing the worst part of a correction.
For example, if we see a 3 wave drop followed by a 3 wave lower high, we have an A and B wave in place. Let’s say the next minor drop is a 5 wave pattern followed by another small lower high. The most ideal place to hedge here is on the smaller high, placing a stop just above the start of minor drop. The image below shows this setup, and the gray box is where you would take protective hedges with minimal risk.
2) Stops – All investors have a buy plan, but many fail to have a sell plan. The idea of a stop is a price that tells you when you are wrong. For example, if I buy a stock at $10, and place a stop at $9 (closing price). Then, if at any point my position closes the day below $9, the next day, I sell at the market with no questions asked.
We believe it is better to stop out of a position early and miss a few percentage points on the rally when it resumes (if we were to miss the new momentum by a couple of days). This is a better alternative to being stuck in a stock wishing we could get out. We use this technique, at times, on opening positions because we want to manage our potential losses, just in case we are wrong.
We do not post our stop prices because we are a popular research site. We will let our readers know that a position has a stop when we open it, but we will not post the exact price, as this information can be used against our position.
We also follow fundamental stops. There is a specific criterion that all of our positions have to adhere to. If we see a critical metric reverse and begin decelerating, or if we get evidence that a specific tech trend is getting saturated, we will exit the stock. This can be jarring to retail investors, specifically if a stock has been rewarding.
However, more times than not, we have seen tech investors fall in love with a stock and believe that their future will be bright. They’ll hold this belief despite the fundamentals (and technical) not agreeing with them. Ignoring these technical and fundamental stops can lead to substantial losses. We do not believe hope is sound investment strategy in tech and therefore adhere to our stops.
Risk Management Tool #3: Hedging
While using technical analysis to gauge market risk, we do believe a rules base, automated risk signal is key to side stepping periods of volatility in the market. We outsource this automated risk signal to the company WealthUmbrella. Led by CEO and lead developer, Vincent Duchaine, WealthUmbrella is a team of machine learning and robotics engineers that have developed a purely quantitative and automated risk signal to warn of deteriorating market conditions.
WealthUmbrella Quant Signals – We utilize two indicators from the WealthUmbrella team to help govern our hedging:
- The Risk Index – derived from 3 indicators that monitor the options market, it is an early warning in and out of periods of weakness. It is more sensitive, and tends to have an average of 4 triggers/year.
The NASDAQ-100 (QQQ) Hedge Signal – This is the primary risk signal, which incorporates a multitude of metrics – such as, breadth, the options market, price momentum, and dark pool volume. It triggers, on average, once a year.
For those members interested in a quantitative approach to risk management, like us, please visit WealthUmbrella’s offerings.
You can gain access to real-time market updates, access to the above indicators and signals into TradingView, as well as a similar hedge signal for Bitcoin.
How to use the hedge signals? We are not licensed advisors so cannot and will not provide personalized advice. Hedging is advanced and can lead to losses. This practice may not be suitable for some investors, so we encourage all members interested to discuss with a licensed financial advisor first.
The below information is designed to educate members on what we are trying to do when hedging our portfolio.
Hedging and Going Market Neutral
The quant-based signals along with our technical analysis are simply ways to measure periods of elevated risk in the markets. While all periods of volatility tend to be accompanied with a measurable deterioration in market health, not all periods of market weakness result in large drawdowns.
While in a bull market, most hedges will be closed for a minor loss, which can drag on returns. However, the point of the hedge is to protect us from periods of extreme volatility, which are hard to predict. We see it as insurance, and necessary for playing the highly cyclical and emotional tech sector.
With that being said, we believe it is important to separate the hedge signal from how we hedge. Our hedge is designed for our portfolio. Our goal is to be as close to market neutral as possible with a simple ETF or combination of ETFs.
How this is achieved is by measuring the beta of our portfolio and then finding an ETF or combo of ETFs that replicate our portfolio’s beta. The measurement of beta is a measurement of how a portfolio or stock performs in relation to a benchmark. Our benchmark is the NASDAQ-100, so if our portfolio beta of 1.5 means that for every 1% up move in the NASDAQ-100, our portfolio would go up 1.5%. This is also the case on downside moves – for every -1% move in the NASDAQ-100, or portfolio would be -1.5%.
Why this is important is that everyone’s portfolio beta is different. If someone has a more diversified portfolio, say, a mix of blue-chip stocks, some bonds and commodities, and then a sliver of their portfolio is dedicated to high beta tech, then that portfolio would have a significantly lower beta than the I/O Fund. So, if that portfolio copied our specific hedge, instead of going market neutral they would be be going net short in a way that could harm long-term returns. For this reason, separating the risk signals that WealthUmbrella provides from how one decides to use those signals is very important to understand.
Do we rebalance our hedge to account for weekly fluctuations? The short answer is no. For example, if we say that we are hedging 100% of our our portfolio, on that day, we calculate the total amount invested (not cash), and then short the ETF or combination of ETFs that will get us 100% hedged.
If the following week we add some of our cash to into beaten down stocks, our invested amount will be more than our hedge, making us not 100%. Also, let’s say or our stock portfolio goes down, say, 3% while our hedge goes up 5%, based on the relative performance of our hedge, we would also not be be 100% hedged anymore. In virtue of us adding cash to our investments and the relative performance of the hedge to our invested portfolio, we will need to rebalance our hedge to account for these fluctuations if we want to remain 100% hedged.
We do not do this. Our goal is to keep it simple by having a counter weight on our all tech portfolio in periods of volatility. We are trying to reduce our portfolio’s drawdown. So, we simply calculate the % we are hedging on the day we issue the alert, and leave that hedge alone until we decide to take it off.
How to read Hedge Trade Alerts:
When we say “Hedge QLD at $111.39 – 10% Hedged” we are saying that we have shorted the ETF QLD at the price listed. Most importantly, we only hedge the invested portion of our portfolio. So, the above example is shorting 10% of the invested amount of our portfolio.
For example, if we have a $1000 portfolio, and $200 is in cash, the above example would short $80 worth of QLD. This would be 10% of the $800 invested.
Conclusion:
Unlike many retail services, we are not hiding behind a stock report that we wrote about years ago. Like these services, we could easily say that we recommended NVDA based on our 2018 article; however, the real questions that need to be answered for real investors are – do you own it now? Have you always owned it? Did you ever take gains? If so, how much and when? Is it worth owning now? If so, at what price?
Not providing an answer to these questions is the difference between analysis and investing. Great analysts are not always great investors, and how one executes analysis over the long-haul is what real investors are seaking.
As real investors that have survived, and even thrived, through the tech-focused volatility from 2019 – 2024, we have done so through an arduous approach that includes risk management. It’s rare to see this many risk management tools offered at the retail level, but these are the actual investing tools that successful investors use.
Wall Street is not so generous as to share their every trade, and the Street certainly does not discuss their plans in advance. Retail sites rarely have enough consistent performance to be confident enough in disclosing their daily actions, as too many sites claim that solid research is enough evidence of being a great investor (it is not). This combination leaves investors in the dark on how to truly approach stock investing.
The I/O Fund has built a loyal base of Members as we were one of the first to provide high quality risk management tools alongside in-depth and original research. We feel this combination is hard to replicate. Our team is dedicated to continuing to serve our customers with the highest level of integrity as we seek to answer the billion-dollar question: how to safely safely participate in the world’s most rewarding industry — tech.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.