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To me, “investing” in its simplest form is putting our money somewhere that we think/hope it will be worth more in the future than it is now.  “Putting our money to work” is how it’s often put.  If we have enough money at work, and it’s working hard, then we can maybe stop putting ourselves to work and retire early.  That’s my dream anyhow.

So how can we make our money earn money? 

• The simplest way is to put it in a savings account.  But these days you’re only going to get about <1% interest, which is less than inflation, so we’re actually losing buying power.
• Used to be you could buy Certificates of Deposit (CDs) and do better than that, but now even they aren’t paying more than 1%.
• Investing in U.S. Treasury notes and bonds used to work, but their current rates are nearly zero percent. 
• We could buy a house somewhere:  home prices are up 5.2% year-over-year from Q3 of 2015 to Q3 of 2016.  And that’s the nationwide average; some markets are up 18% over the same time period.  Now this investing thing is getting interesting!  But you have to be careful that you buy in the right place, because some markets went down during that time!  And there are closing costs on both ends, insurance, upkeep, taxes, maybe HOA fees, etc, plus the bother of finding, holding, and then selling the house.
• Maybe we noticed there was a collectors’ market for Nintendo game cartridges, so we bought some of those.  Wow, now we’re talking!  We could’ve bought a big collection in January 2010 at $7.50/game (on average), and sold them in January 2016 for $22.50/game.  That’s a 200% gain, or roughly 33% per year.  But being physical “things”, we still need to store them somewhere, and hope that somewhere doesn’t burn down in the mean time.

So what we need is a liquid investment vehicle that’s easy to buy and easy to sell, and doesn’t cost us anything to hold.  The “stock market” fits that bill nicely.  But what is “the stock market”?  Do I have to buy only stocks?  No, and that’s the beauty of it.

• Owning an individual stock is a lot like owning an individual house somewhere.  Any number of things can happen to make its price go down, things that aren’t even related to the company whose stock it is.  New tensions in the Middle East?  Your stock goes down.  A stock market flash crash?  Your stock goes down.  The company announces it’s going to buy another company?  The stock goes down.  The company’s newest wonder-drug fails FDA testing?  Kiss your stock goodbye before you can even react.

First, we need a paradigm shift:

Forget “Buy and Hold”. 

Replace with:  “Cut your losers, and let your winners run.”

(I could write reams on this one.  Research shows that we’re hard-wired to do just the opposite.  “I’d better sell this while it’s up,” and its cousin, “I can’t sell now and take a loss!”)

Forget “Don’t put all your eggs in one basket.” (AKA, Thou Shalt Diversify^©)

Replace with:  “If you DO put all your eggs in one basket, watch that basket pretty closely.”

     (And we’re not going to put our eggs in a very risky basket to begin with.)

The System in a nutshell:   Put your money in some investment that’s doing well. When it stops doing well, take your money out. Re-evaluate every x time period. Change investments and/or put new money in.

That’s it.  In theory, that will work with ANY investment (stocks, bonds, funds, houses, rare coins, gold, baseball cards, etc.). 

In practice, individual stocks will kick your butt. 

ETFs are better, being a “basket” of things, but they can be fairly volatile.

Mutual funds by nature are very diverse and pretty non-volatile.  Fidelity Select funds even more so.  For one to move 3% down in a day is unusual.  10% in a week is almost unheard of.  So if you’ll just look at your positions every weekend you won’t get in much trouble. 

And making one of these picks takes <10 minutes:

1. I like Barchart.com.  See pic below for how to get the list. Note the arrows, go top to bottom.
2. You may find/know other websites to do the same thing, but most won’t give you MF monthly performance data.  I suspect they’re pressured not to by the fund houses, who don’t want people trading in and out of hot funds.  But Fidelity’s website encourages you to do just that with their Select funds.

• Keyword search “Fidelity” and find the first Fidelity Select fund on the list.  If no hits on the first page go to the 2^nd, or Show All.
• You can choose other Fidelity funds (that are not Select funds), but check their Early Redemption periods and penalties first.  (Many funds these days are 90 days and 2%. Fidelity Selects only charge 0.75% if you sell within 30 days.) 
• Don’t buy the Fidelity Select Gold Fund, FSAGX.  It’s too volatile.  Just. Don’t. Do. It.  Many other people have said that too, and it actually hurts performance in back-testing.
• You can certainly choose other fund families and they’d probably perform as well, but be mindful of minimum holding periods and early redemption fees.  (And never ever EVER buy a load fund, one that charges you a percentage just to buy (or sell) it.)
• Notice the funds at the top of the list in the screenshot.  STAY AWAY from those.  They’re leveraged out the wazoo and way too volatile.  Profund, Rydex, Direxion, anything with 2x, 3x, Long, Short, Bull, Bear, or Ultra in its name, I don’t touch. (Anymore. Yes, I’ve been burned by them.)

That’s it.  For guys like me with little piles of money to play with, I go all-in on one pick, then move to the next hot-runner. Evaluate weekly and move if indicated.  If I had bigger piles of money I’d stay in previous picks and put new money in the hottest-runner.  I’d only get out if they hit my trailing stop amount, or if one was languishing and that pile of money could do better elsewhere.  If you open an account with Fidelity (it’s free), these trades are free. 

So, The System, with specifics:

• Buy the Fidelity Select mutual fund that’s gone up the most over the last 30 days.
• If it goes down 5% from its peak, sell it.  (A trailing stop.)
• Re-evaluate weekly. 
• Put new money in, or change investments.

Some things to note: 

• When you say on Sunday, “I’m going to buy X fund,” you put your order in Sunday (or Monday before 3:00 for that matter) and it executes at Monday’s close.  You don’t get Friday’s closing price.  Not a big deal, just be aware. 

• My stop loss is mental; you can’t set an automatic trailing stop on a MF (like you can on a stock).  But this means you can lose more than whatever percentage you set for yourself:
  • Say I bought one yesterday at 100.  Today it closes at 95.  That’s down 5%, so I want to get out.  I put in my sell order tonight (or anytime tomorrow before 3PM) and I exit at tomorrow’s close.  It might go down more tomorrow, or stay flat, or even go up.  But if you have some kind of stop-loss point and the discipline to execute it, you should stay out of trouble.
  • But if all works as planned, my fund goes to 110, then maybe 120, before it drops 5% (to 114).  I put in the sell order and get out at the next day’s close, locking in most of the 14% gain before it goes away.

Some Background

This is called Momentum Investing.  I didn’t invent it, it’s been around a long while.

And the idea of using Fidelity Select mutual funds to do it isn’t new either.  A Google search reveals quite a lot of discussion about it. 

But I’ve yet to find someone doing monthly momentum with them.  For the most part they’re doing three months, up to a year.  Here’s an interesting article:  Sector Rotation Model   Synopsis if you don’t care to read it:  He back-tested from Jan 2005 to March 2010 (thus capturing bull and bear markets) a system that chose a single FS fund based on past-4-month performance, holding at least a month.  He used a stop-loss of 15% (way too high for a mutual fund imo).  Plus he held a fund if it still ranked in the top 10 (out of ~40), rather than trade into the best performer at that time.  I can see top 3 or 5 maybe, but to be holding the 10^th ranked fund must’ve really hurt performance. 

All that said, and with only 19 trades over 5 years, that system returned 24% per year.  I probably don’t need to tell you, but that’s HUGE.  The S&P500 over the same period returned -0.4% per year.  100k in an index fund became 98k, while 100k in his system became 293k.  Which outcome would you rather have?

So how well have my recent picks been doing?  Let’s see:

Fidelity Select strategy: 1^st-quarter performance

Weekly picks started Monday, December 9^th.

Friday, March 7^th, was 13 weeks later, one full quarter.

How “the market” did over that period

S&P500 up 3.9%.     NASDAQ up 6.6%

Those numbers should bound what a market-index “buy and holder” would’ve made.

Not bad at all: 16 to 26% per year if the trend held.

How the Fidelity Select funds did over that period

The first pick on Dec. 9^th was the median performer of the five different picks, and never hit the 5% stop-loss, so its performance equates directly to “the market” over this period:

    FSPHX up 17.6%.  4.5x the S&P, 2.6x the NASDAQ.  70%/year, if the trend held.

 A picture being worth a thousand words:

Note that the drawdown in late January is less for the fund than the two indexes.

There are lots of ways to slice and dice the data, but one I think is most meaningful is average weekly percentage gain.  If we apply that to “the market” over this period:

S&P:  3.9%/13 weeks = 0.3%/wk.  NASDAQ = 0.5%/wk

The five fund picks returned, in this order:  1.3% per week over 13 weeks, 3.0% (6 weeks), 1.1% (10 weeks), 1.9% (5 weeks), 0.05% (2 weeks).

A weighted average of those is 1.6% per week.  (Interestingly, if you can get 1.4% per week, you double your money in 1 year.)

Worried about downside risk?                                   

The S&P was down from the entry point a max of 3.7%, on 2/3.                 

NASDAQ was down a max of 1.8%, also on 2/3.                 

FSPHX was down a max of 2.6%, on 12/12. Midway between the S&P and NASDAQ.  And this was the fund that had the worst dip.  The others were ever only down 0.5% to 1.2%, way better than either market index.

Conclusion

Returns were better than the market, downside risk was less, and only 5 buys and 1 sell were made over the 13 weeks (so, an average of one trade every two weeks; that’s not hard to do).

10 minutes each weekend to check your positions and look for new performance leaders.

I hope you’ll really look into this strategy.  There’s nothing magic or hard about it, it’s just putting your money where the best performance is.

Gory details if you’re interested

If this doesn’t get you excited about this I think nothing will.  Taking as an example someone with the means to invest $100,000 piles of money, making the picks I’ve made, you get:

1^st pick, FSPHX on 12/9:  17.6k profit to date.  Never hit the 5% stop, so 100k still in that trade.

2^nd pick, FBIOX on 12/16:  18.6k profit.  Hit the stop on 1/27, so that money is out.

3^rd pick, FSELX on 12/30:  11.1k profit to date. Still in.

4^th pick: FBIOX again on 2/3:  9.4k profit to date. 

5^th pick, FPHAX on 2/24:  0.1k profit to date

Total profit is 56.8k.  Times 4 quarters is over 220k a year.  With only 400k invested at any given time.  A 55% return on investment. 

Yes, you’d have to pay taxes if this wasn’t in an IRA, but since short-term capital gains are taxed at your normal tax rate, could you live on a gross salary of 220k? 

And yes, the market is in a good period right now, but 400k invested in the S&P during the same period is only up 3.9%, or 0.3% per week.  That’s dwarfed by the returns on these funds.