Mixing It Up

Some readers seem to be preparing themselves for a turnaround in the market place. Given current conditions, it would seem that we are far away from any lasting bullish scenario. Be that as it may, one reader had this question:

I am one of your regular readers. Thanks for helping many of us. Would you please elaborate more on how you decide on the mix of ETFs and mutual funds? How do you decide what fraction of money is to be invested in US, what fraction to be invested in emerging, single country etc. I understand your TTI system. But how you choose different countries and sectors is still unclear to me. Would benefit from your insights.

There is no hard and fast answer and the selection process is simply a matter of preference along with risk tolerance. If the domestic TTI signals a buy, as it did on 5/15/08, I look at the momentum table in the StatSheet and review the rankings for domestic mutual funds and ETFs. Since we’ve broken above the long-term trend line, many funds/ETFs will show good upward momentum.

Not only do I look at those numbers, I also want to make sure that the mutual fund/ETF under consideration has broken above its own individual long-trend line as you can see in the column titled %M/A. At that point, I am aware that the top ranked performers are also the ones that will correct the fastest. So I may drop down a few points in the M-Index ranking and select a mix of funds/ETFs with different orientations.

I don’t have a particular allocation of mutual funds vs. ETFs. If the momentum figures are equal, then it’s simply a matter of preference. I will also look at recent history to see how much DrawDown any of the funds have had. You won’t have access to that figure, since it’s not published.

At the beginning of such a domestic Buy cycle, I will allocate only 1/3 of portfolio value to be sure the market continues in the intended direction. If it does, I will increase my exposure.

If the international Trend Tracking Index (TTI) signals a buy as well, I will follow the same guidelines.

In regards to sector and country funds, they dance to a beat of their own drummer. You need to follow their momentum figures and consider a position when they cross their individual trend lines to the upside. Since those areas are notoriously volatile, I would only allocate 5% to 10% to any one holding.

No matter what you invest in, you always have to be prepared for the inevitable fact that trends will reverse. That’s why it’s imperative that you never fail to work with trailing stop loss points such as I advocate. Taking small losses is part of investing whether you like it or not. Staying away from the big ones is the goal that should be foremost on your mind.