On ETFs, CEFs, MLPs And Trend Tracking—One Reader’s Experience

You just never know what all you can do with the concept of trend tracking until someone else tells you about it. That was the case with reader KD, who more or less customized trend tracking to match his risk tolerance and investing preferences.

Here’s what he had to say:

I thought I would share some of my results since we first communicated. In March 2009 I had a net worth of about $3.9 M of which $0.5 M was house, leaving $3.4 M investable. In March 2011, I have $4.9 M investable.

With your help, I avoided the 2008 fiasco and then jumped in with both feet in the 2-3 qtr 2009. I like to balance my portfolio with income producing instruments, but don’t care for typical bonds. In the 4 qtr 2009 I bought about $1.3 M CEF munis, paying 5-7% tax free,  and sold them in November 2010 for a substantial capital gain and then invested about $1.5 M in oil & gas pipeline MLP’s, which pay 5.5% to 7.5% and are now worth about $1.7 M. I use cefconnect.com to help select the CEF’s and tickerspy.com to help me select the MLP’s.

The balance of my portfolio is in ETF’s.  My account is with Etrade and I use only limit orders. Cost is $10 per execution. Note I follow your trend tracking index and will go to 100% cash if the market turns against me.

I don’t watch TV or listen to radio shows on investing. I do read the WSJ, but come to my own conclusions. I also read Seeking Alpha to keep up on the ETF’s.

I am a cautiously aggressive investor, which means I watch your trend tracking index, and am more aggressive at the beginning of a new cycle and less so as the market begins to top. I select my ETFs from the ETFscreen.com web site. There is a very comprehensive listing and I especially like to see the Trends screen to see what is moving fast.

I buy only ETF’s rated 90 and above and the higher the better. Often I stick with 95 and above if there is sufficient selection for some diversification. While I don’t buy multiples of basically the same ETF by the differing suppliers, I do limit any single investment to $200 k. Before I purchase I make sure I understand the ETF and check out the graph and history. I do not buy ETN’s or leveraged ETF’s and generally avoid the commodities, although I do own SIVR. I also check out the ETF on the Tradingday.com., which I find to be a very reliable indicator.

I always use an 8% firm planned stop loss, and, as you do, execute the next day unless the market firms up. Now the one major difference from your approach is that I generally sell when the RSf goes below 80. I take the gain and run, I find that few ETF’s are able to recover from that large a dip and there is always a stronger ETF with a 95+ RSf. Usually the ETF’s will hit the lower RSf before the stop loss is triggered, but then I immediately turn around and reinvest in RSf 95+ ETF’s. Fortunately most of my investments are in tax deferred accounts, except for one taxable account, where most of the MLP’s are held. Thus I can trade without any tax ramifications.

I do trade more often than you do, and executed about 150 trades last year although I do have ETF’s that I have held for over a year.

I do wish to share how much you have helped me by providing a fundamental platform, especially the weekly trend tracking index, and the importance of 200 day moving averages. While I have “drifted” from your approach, I recognize that as an individual with my own money I can be more aggressive and trade more often.

I hope this note provides some insight on an alternate to your precise methodology.

Yes, that’s a very interesting and customized way to take trend tracking to a different level. KD uses all of the basics that I advocate like never watching TV shows on investing and being disciplined with his exit and re-entry strategies.

Whether he uses a strict 8% sell stop discipline, or gets out prior via the RSf reading, really does not matter. What matters is that he has a definitive plan of action that helps him grow his assets and more importantly, protects him from downside risk.

KD’s way may not work for you, but I commend him for taking a different approach, and I thank him for sharing it with us.