FundVision Classic Collection - Rich's

Author: Rich

Frustrations I hear from posters who rebalance are echos of those I experienced several years ago when I thought doing that was the wise and prudent way to profit from the market. There were (and probably still are) several on the MFI board who preach this strategy with the conviction of a religious zealot. Fortunately, the advice I got from several of the posters who have since formed or migrated to this board, together with my own investment experiences have turned my ho hum results into amazing profits. Of course, the game isn't over, so in the end they may be proved right. But it would take a crash the likes of which we have never seen to take my profits away, and the chances are they would go down with me.

Lesson 1. Reallocating from an upwardly mobile fund still in an upward trend is exactly the wrong way to go. The first rule in my book of investment rules is to run with the trend or hot fund(s) until it shows confirmed signs of fatigue. This does not mean trading on the first downturn, but it does mean hold until the trend sustains a reverse. Then trade or go to cash before it makes too big a dent in profits. One or two major breakthroughs on the upside can overcome a lot of minor setbacks and have made the year for me on more than one occasion.

Lesson 2. Concentrate my investments into only as many vehicles as I can manage effectively and make sure they are maximizing my results. In this regard, I have sworn off spreading my risk in every direction (bonds, value sectors, non-trending funds, among other vehicles are currently off my buy or hold list). Like many, I got tired of seeng my good gains in one sector reduced or even offset by laggers or losers in other sectors. What good were bragging rights to having the hottest fund in the universe if I also held some dogs that dragged  me back to average overall results. I might as well have held an index fund and saved myself the bother of watching how individual funds are doing. Having a real hot fund or two makes for an exciting post that might make me look smart, but it's the overall portfolio result over a period of time that pays the bills.

Lesson 3. I no longer hold a fund, regardless of s/t or other penalties if it is lagging. I switch at what I think are appropriate times to funds that seem to offer greater immediate rewards than those I'm holding. I have neither the patience or time to wait out value plays. I watch the daily, and in the case of Fidelity Selects, hourly price changes to spot trends and to make the best fund selection and timing of trades I can. I also keep lots of records to see how I can improve my selections. For example, When I make a trade, I track the performance of my new fund against the fund I traded out of and against other funds on my watch list, as well as the indexes. The tracking uses the trade date as the starting point, not YTD or any other arbitrary measure. For example, not too long ago I traded out of FSELX and into FSPTX. FSELX is my "default" fund which I am in while weaiting for other sectors to show better promise. But I noticed that FSTPX was currently gaining  more and losing less in market swings than FSELX. FSELX has outperformed FSTPX since the beginning of the  year by a substantial amount. But since my exchange, FSELX has lead the way. Even if other funds show temporarily better results I made a good trade so I can't be too hard on myself. The record keeping is how I learn to improve, and I have far to go to do as well as some of the others here.

Lesson 4. When to step in. When to lighten up. The two main questions in the "Who wants to make a million?" investment quiz program. If the answer were simplistic everyone would do it and it wouldn't work any more. So I can only answer the implied questions concerning when to jump in and when to get out or lighten up in the following way.

First of all, in the current bull market, the overiding interest on my part is not whether to be in or out of the market -- it's in what sector should I be in. The current market is one in which money is flowing from one hot spot to another, sometimes daily, even intraday. You've got to know the characteristics of the funds you're in -- or thinking about being in. What sectors and companies are currently represented in them? How have they been doing (trending)recently? What do you know about their investment strategies?

I study relatively few funds that have been good performers over the long haul. I analyze how they do in both up and down markets. How long do their upward trends last? How long and how far do they fall? Do they recover quickly? Are they subject to sudden and steep downdrafts?

As I previously stated, I keep lots of records. Perhaps I'm a cumpulsive record keeper, but doing so is necessary for me to make informed judgements as to when to enter or exit a fund. Not too long ago I posted an analysis of the daily hourly and daily movements of FSELX. The analysis displayed the distribution of the durations of both up and down streaks over a period of 100 sessions. It forms the basis of my decisions as to how long to stay with a downturn in the tech sector and when it might be a good time to jump back in. I hope to update the results every 50 sessions.

Lesson 5. One of the most frequently asked questions concerns how to identify the top and the bottom of a trend. The entire field of t/a is devoted to attempting to answering it and books upon books try to tell us how. My answer is "I can't and I don't really try."

This was the first, and certainly one of the most important lessons I learned. The futility of trying to pick the top or the bottom was drilled into my conciousness until it became a mantra. Once I fully grasped this concept, certain consequences naturally followed.

For one, I stopped pouring money into value plays--investing in sectors that were down on the theory that they were due for a rebound. Japan, gold, and my sad experiences proved that there is no limit to how long a sector can stay down and no bottom below which it cannot fall. Until I see an upward movement confirmed by recent patterns of recovery, it's hands off. That's why I tend to stay only with sectors and funds with which I am familiar. It takes time to get a feel for how a fund normally reacts in varied market conditions.

Secondly, I stopped exiting funds on an upward run unless one of the other funds on my watch list was consistently doing better at what my present fund had been doing--namely; rising faster with shallower retreats. I am satisfied to catch the meat of an increase, conceding that I will miss some of the rise at the bottom and probably give some back at the top. If that means I drop a few opportunities or occasionally get whipsawed so be it. I won't win them all -- but if I consistently stack the odds in my favor I'm bound to come out far ahead in the long run. And so far, that has proved out.

Of course there is much more to investing successfully and I have much more to learn myself. We each have to tailor our own strategies to our personal skills, levels of comfort, and experiences. But I hope the lessons I have learned the hard way will help others while on their way toward meeting their investment goals avoid tripping over the same ditches I did.

Best

Rich