Mutual Fund Investing

The need to pick stocks and know when to buy and sell them is a daunting task for many average investors. Many investors like mutual funds and exhange traded funds since they offer easy diversification and give the job of stock selection to the experts. But you are still faced with the decision as to which funds to buy.

Many financial advisors give up and hold that the Efficient market dictatest that we can’t beat the market, so buying low cost index funds is the best approach. With this approach, market risk is mitigated by diversification, by sector or geography. The system is to allocate a fixed part of the total to each asset and keep it fixed by rebalancing periodically. But, if we look past the research papers and examine the real world results, we find that some advisors do beat the market averages over long periods of time. Examining the records of the best mutual fund advisory services, it becomes apparent that the better performing advisory services use some type of trend following system.

Trend following is simply a system of identifying which of the family of funds your are following is the top mutual funds by measuring relative strength or percentage change over the last few weeks or months. Almost none of these sector rotation strategies use a ranking period as long as a year, so you won’t get the same results if you trade based on the year end rankging of the best funds for the year. Buy the top fund, keep it for up to 3 months, and then sell and buy the new top fund.

Many funds won’t allow trades more often than every 6 months so you need to find a mututal fund family that will allow more frequent trading. Fidelity has a large number of fund offerings and the best Fidelity funds to use for this system are the Fidelity Select Funds. These only need to be held a month to avoid redemption fees, and are taken from over forty different sectors. Another alternative is to use an exchange traded fund family instead of mutual funds.

By using a sector rotation system of holding the top funds for a relatively short period of time, you can increase your return over that of the market and reduce the downside volatility of the portfolio, which is really the goal of any investment strategy.