myfinancialmarket.com

I suspect it is likely that investors of retirement age will recognize this Bob Dylan protest song of the mid ’60’s, yet these words seem appropriate yet over 40 years later as we are seeing a Market Meltdown like I haven’t seen in my investment time in the stock market (21 years), yet likely this is also an experience you are suffering from, unless you trade on the downside of the Market by shorting stocks or buying ETF’s which short various segments of the Market.

Since this Blog is about my financial markets, I will write a little about my investment years. Going back in time just a few months prior to Black Monday in October of 1987 when the Dow Jones Industrial Average fell over 22%, I became a technical trader, actually developing a trading method for Fidelity Mutual Funds prior to October of that year. I did this with a momentum (think of this as a price acceleration of daily ending prices approach.) For many years I traded Fidelity Funds using this approach. I even allowed for holding periods that Fidelity imposes which varies from 30 days on upwards. it was successful even through the downturns of 2000-2002. The method would follow what is moving best. If Foreign Stocks are hot, I would hold a mutual fund which bought these stocks. When gold is hot you buy gold, when bonds are hot, you buy bond funds. In subsequent years, I became less interested in doing daily downloads of Mutual Fund data and wished to find at least a weekly only or monthly only trading scheme. This would minimize my active involvement in the Stock Market as life does offer so many other pleasures than watching the minute by minute, hour by hour, or day by day movements in the Market.

During the last Bear Market of 2000-2002 I found myself moving out of the overall Market (call it “Fold em”), yet in the investment club I belonged too, I could hear the members suggesting they would like to have a longer term (than 30 days) approach to investing. So I took a look at this and came up with a once-a-month trading scheme.  What I did was to back test algorithms, using the same Fidelity Mutual Fund data base, yet instead of short term trading utilize a monthly trade whereby I would sell a bottom ranked fund from a group of 10 funds being held and buy a top ranked fund. This is referred to as Market Rotation - a technique utilized by one of the best long term investment newsletters, No Load FundX.  I modified my trading formula to fit the monthly time period and started trading Fidelity mutual funds monthly. This is still likely a good long term technique, yet because of the short term swings of the 2008 stock market this method has not been positive so far in 2008.

Although the monthly approach on a back testing basis would have lost a bit in 2002, the overall 1996-2007 results were quite impressive. In 2007 alone, the monthly trade method achieved over 25% gain. This year however, I see declines of about 30% — the method was no longer working. One lesson I have learned about trading the Markets is that there are indeed time periods when a trading system will not work and 2008 is one of them for monthly trades

A second change I made was to expand beyond Fidelity Funds only and to hold a basket of non-Fidelity Funds for at least one year. The one year hold was partly a result of fees that would be imposed for short term trading of non-Fidelity Funds and also to match the approach taken by the investment club I belong to where they would pick at the beginning of each year a group of 10 mutual funds to hold for one year. This allowed me to become familiar with what other investment club members were holding for their mutual funds, and to also allow me to recommend various non-Fidelity funds to others I know. This approach also introduced me to many good funds including conservative funds such as PRPFX. I liked this, although being at heart a technical trader I was always nervous about what I considered a long term commitment.

The one year hold method I chose was to hold 6 mutual funds (Non Fidelity). I utilized an evaluation approach that required high price momentum over the previous 3 years.  The 6 funds would be diverse in style so as not to be too correlated. For example, one fund may be a Large Capitalization Growth fund, whereas another may be a Small Capitalization Value fund. The risk was small, the investment was minimal. Given a few good Market years since 2002, a person soon forgets those years when the NASDAQ lost about 50% following the bursting of the dot-com stock bubble of the late 1990’s. (as a side note, we now are experiencing a bursting of the real estate bubble)

Continuing on this path of one-year holdings of funds,  I looked at holding 20 Mutual Funds which offered greater diversification into the other segments of the Market (once again how quickly we forget what a Bear Market can do to our portfolio). Twenty funds were selected so as not to hold more than 5% of assets in each fund. So in addition to the usual selections of Large Cap to Small Cap, Growth to Value to Blend, I added in holdings of 3 International mutual funds including the segment of Emerging Markets. To further diversify and to reduce overall risk, 3 Bond funds were included. More diversity was achieved by adding in a Real Estate fund along with a Convertible Securities fund. To complete the list the conservative fund mentioned above, PRPFX, Permanent Portfolio was included. This fund invests in Swiss Francs but also has a good portion in gold. The thought for what I called the Lazy 20 was that with a wide diversification, I would always have one of the segments doing well. Today when I look at the performance for the Lazy 20, I see this thought didn’t live up to its expectations as the group is down about 32% for the year as I write this.  Real Estate is actually the worst performer in this group with a decline of 58% for EGLRX (as of Oct. 6th) and the best is a bond fund, BTTNX, with a positive gain of over 5% for the year. To be on the disclosure side of things, my total holdings in the Lazy group is about 15% of my total portfolio, as I’m still not basically a buy and hold type of investor. Also my holdings in the Lazy 20 are not currently evenly balanced as I’m overweighted in Bond funds as well as PRPFX.

So the question really is where do I go next? For sure I will re-evaluate which funds to hold in the Lazy 20 group as well as to relative percentage of holdings. For the future I’m leaning to more trading of ETF’s (Exchange Traded Funds) which include shorting-of-the-market type of funds. This way I effectively can create my own Hedge Fund ( A fund that can either go long on the Market, or short the Market). I will also continue trading individual stocks, which as an investment style, has done the best for me this year with a year to date positive result.  More on these in future writings.

Don

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