THE BEST INVESTMENT STRATEGY
Six categories of funds:
By combining these concepts, we can create the following six categories of mutual funds. To find the category of a particular mutual fund, search for the fund in financial websites, such as Morningstar. (By the way, ignore the Moningstar ‘star rating’; it has proven to be inconsequential in past down markets).
Here are six categories of mutual funds and ETFs:
- Large Cap, Value
- Large Cap, Growth
- Mid Cap, Value
- Mid Cap, Growth
- Small Cap, Value
- Small Cap, Growth.
The best investment strategy
The investment strategy that I am about to describe involves trading mutual funds or ETFs every now and then. Follow these steps.
- Step 1. Select three mutual funds or ETFs in each of the above six categories, using the considerations mentioned above: total return, risk, trading fees, fund age, fund issuer record, manager tenure, and minimal holding period. This will give you a total of 18 mutual funds – three in each one of the six categories.
- Step 2. Prepare a spreadsheet: Prepare a spreadsheet (such as OpenOffice or Microsoft Excel) with the eighteen mutual funds you selected as its column heads.
- Step 3. Paste into each column the adjusted daily price history of the fund over the last year. You can find this information by looking for historical quotes on financial websites; one place where price history is available is the Yahoo finance website. Make sure to use ‘adjusted price’, since the adjusted price takes into account dividends and other distributions of the fund, in addition to changes in share price.
- Step 4. Calculate the average adjusted daily price over the last year for each fund by pasting the spreadsheet’s ‘AVERAGE’ function right under the list of historical prices in each column.
- Step 5. In the next row of the spreadsheet, enter in each column yesterday’s closing price of the fund of that column.
- Step 6. In the next row of the spread sheet, calculate the ratio (= numerator/denominator) of yesterday’s closing price (the numerator) over the one-year adjusted price average you calculated before (denominator).
- Step 7. Use the spreadsheet’s sort function to sort the columns from the highest to the lowest value of the last row (i.e., by the ratio of Step 6).
- Step 8. Move your investments into the funds represented by the first six sorted columns in your spreadsheet after sorting, namely, into the funds with the best ratios.
- Step 9. Repeat this process once every month on the same date.
Note: When trading funds, make sure that the sell and the buy transactions occur at the same time; you don’t want your money to be out of the market for a day or more.
Extensive simulations of historical price records show that, over periods of 5, 10, and 15 years, this systematic investment plan has generated better returns that plain index investing. It seems that adding bond funds to the mix tends to reduce returns over the long run.
Good luck with your investments!