A simple way that you can become your own investment advisor using the trend following plan developed by Dick Fabian.
Step 3, What To Buy
For most investors, this is the most important part of investing. They feel they must be in the hottest stock or sector. But they often only put to work the play money.
Not us.
Since we have set our goal and understand the power of compounding, we realize, as Dick Fabian said, the investor is more important than the investment. For us, this is the least important part.
When its time to buy, NO asset allocation, NO bond funds, NO cash. We put 100% of our money into high momentum funds. Experience has shown that funds with the strongest momentum at the beginning of an up trend, generally (not always) perform the strongest for the entire up trend cycle.
Listed below is just a small sample of Funds and ETF's that track the listed market indices. There are many others available. Do a bit of homework and look at the options. Look at the Tools page for links to different sites. Remember what Al Thomas says, "if it doesn't go up, don't buy it".
DJ US Broad Market: (StockCharts $DJUS) IYY
S&P 500: ($SPX) IVV, BLPIX
S&P 400: ($MID) IJH, MDPIX
NASDAQ 100: ($NDX) QQQQ, OTPIX
Russell 2000: ($RUT) IWM, SLPIX
Gold: ($GOLD) GLD, IAU
MSCI EAFE: ($MSEAFE) EFA
US Dollar: ($USD) UUP, RDPIX, UDN, FDPIX
So how can we find the high momentum funds and areas to invest in. Momentum, MoJo, Relative Strength or whatever you want to call it is just how one area of the market is performing against other areas and the general market. When we buy, we want to look for that strength, that high momentum.
How do we find momentum?
Dick Fabian had his method. He looked at the last three months of returns and did his weighted momentum calculations. His information was published in his weekly Stock Market Roadmap.
I have my method. I look at the last 12 weeks (which is roughly 3 months)in three 4 week periods. Then I do a weighted calculation to define which areas are strongest. You can sign up for my FREE Weekly Momentum Monitor on the contact & feedback page. When the market gives a BUY signal, you can refer to my Weekly Momentum Monitor to find those areas of the market that are performing best.
You can develop your method. You can use free tools available on the internet to start.
On the following tool, look at the 3 month return ranking for a place to start. Look at different sectors. There are many. You could start with: Growth-Large Cap, Growth-Mid Cap, Growth-Small Cap, Value-Large Cap, Value-Mid Cap, Value-Small Cap.
If you have existing funds, you can rank them against each other on this next tool. This would be good for your 401(k) funds. If you have an S&P500 fund, enter it first and use it as your benchmark. Other fund choices doing better than the benchmark, for the 13 week return, would be a good place to start. Or, you can compare the funds you found in the first tool.
If you don't have a fund to use as your benchmark, try these.
VTSMX, is a fair comparison to the Wilshire 5000.
VFINX, is a fair comparison to the S&P500.
VDMIX, is a fair comparison to the MSCI EAFE (for international funds)
Here is the tool for ranking your existing funds, like your 401(k) choices. Check the returns for 13 weeks. That would be a good place to start.
Mutual Funds or ETF's? Many choices.
Mutual Funds (MF's) and Exchange Traded Funds (ETF's) both have pros and cons. What is important to one person will be less important to the next. But some things to remember are:
ETF's generally have a lower cost of ownership than MF's.
ETF's can trade throughout the trading day. You can get in or out (depending on share volume) whenever you want. You can normally only get in or out of a MF at the end of the day. (Some MF's do have twice a day trading.)
MF's can allow you to purchase fractional shares. You can invest your full $1000 (for example) and be fully invested.
ETF's require you to buy whole shares. When you invest your $1000 (for example) you will only be invested to the next lowest whole share based on share price. Some ETF's require a minimum of 100 shares (called a round lot) to be purchased.
MF's don't normally have "trading" fee's. They are built into the higher cost of ownership. Some brokers do charge direct purchase and sell fees. Check with your broker.
ETF's do have trading fee's. The cost of purchasing shares. Use a discount broker for the lowest cost.
Most MF's are liquid. You can get out when you want.
Some ETF's are not liquid. Low trading volume could limit your ability to sell quickly.
Most MF's have minimum holding periods and charge you for selling early*.
*ProFunds, Rydex Funds and Direxion Funds are designed for "trading" and in most cases don't have minimum holding periods or redemption fees.
Do some research into MF's and MF Families, ETF's and brokerage options.
See the Tools page for links to ProFunds, Rydex, Direxion, iShares and many other investment choices. For more info on ETF's check out the various financial sites listed on the Tools page. They all have sections on ETF's. There are also some ETF sites listed on the Tools page. There are now also MF's and ETF's that take advantage of a declining market. These are refered to as "short" or "inverse" funds. Look at the Tools page for more info.
CLICK HERE to open a chart, in a separate window, for the Wilshire 5000 Index. You can then enter other symbols to see current trends.