Online Stock Trader

The stock picking process is one that many investors would rather not deal with. Most investors like exchange traded funds or mutual funds as the stock selection is no longer their problem and diversification is simplified. Not answered yet is the question as to which mutual funds are those you should be buying.

Some financial advisors are ardent believers in the Efficient Market Theory and contend that the only thing you can do is to buy and hold index funds. The assumption is that the only way to reduce market risk is by diversifying into different sectors or countries. But the basic approach is to determine a percentage of your holdings to allocate to each asset class and to rebalance to that on a periodic basis. Setting aside the academic research for the moment, the advisory tracking services tell us that there are advisors who do manage to beat the markets for years. When looking at the Hulbert advisory tracking service, one thing that jumps out is the fact that the top mutual fund advisories tend to be trend following systems.

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. It’s important to note that most of these systems do not use a period as long as a year, so the annual ranking of funds for the past year’s performance is of little value in trend following system. Buy the top performing fund, hold it for the assigned period (up to 3 months) and then exchange it for the latest top performing fund.

Since these systems have a short holding period you need to find a fund family that will allow trading at the frequency needed. Fidelity has a large number of fund offerings and the best Fidelity funds to use for this system are the Fidelity Select Funds. The Select funds have the advantage of a one month minimum holding period, and you can choose from over forty funds. Exchange traded funds can work just as well as mutual funds in one of the trend following systems.

By using a sector trading 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.

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