Our Aggressive Invest with the Winners Portfolios
We are low risk investors here at Retirement Watch. Carefully assess the risks and avoid the big losses is a big part of my investment philosophy. The gains will take care of themselves because of the long-term growth trends in the economy and the markets. That is why instead of searching for the next investment home run, I look for a margin of safety in every investment. Because we avoid the kinds of losses that obliterated many portfolios after 1999, we rack up higher long term returns.
Even this investment approach has room for an Aggressive Investment Portfolio.
For years I have offered an aggressive investment strategy called Invest with the Winners. It has delivered some strong gains while maintaining the margin of safety that I demand of all investments.
The IWW is a simple investment system that follows market trends. We do not try to anticipate market moves in the system. Instead, I established simple buy and sell rules that tell us how to invest the portfolio.
The basis of the IWW is my database of about 300 mutual funds. I track the performance of these funds and publish the returns of the top 15 funds over different time periods. The ranking is based on my proprietary formula.
The buy rules are simple. Purchase equal amounts of the top two funds, as long as a fund does not have negative returns for the last four weeks and is not more than 5% below its recent high value. If a top-ranked fund does not qualify for purchase, do not skip down the list looking for a qualified fund. Instead, leave that fund’s share of the portfolio in a money market fund until the next month’s rankings arrive.
You can modify the rules a bit. Some investors want to own more than two funds. They might purchase the top four funds. Another modification is to not buy a fund if it has negative returns for either the last four or 13 weeks.
The sell rules also are simple. There is only one sell rule to follow between our monthly visits. If a fund drops more than 5% from its recent high, sell it. (“Recent” means from up to one month before you bought the fund.) For more volatile funds, such as emerging market stocks, I recommend the sell trigger at 7%. That reduces the potential for a premature sale during a modest, short-term correction. When a fund is sold between issues, put the proceeds in a money market fund until the new rankings arrive in the next issue.
I also recommend selling a fund when the return for the most recent four weeks is negative. If you want to reduce the amount of trading you do, sell a fund when the most recent 13-week return is negative.
Notice that you do not sell a fund when it drops from one of the two top ranks. Suppose a fund has the top ranking one month and meets the other purchase rules, so you buy it. The next month the fund is ranked number seven. You continue to hold the fund until one of the sell rules is triggered. If the fund has not dropped more than 5% from its recent high and does not have negative returns for the last four weeks, it stays in your portfolio. You do not buy the new top-ranked fund.
This is a market momentum system. We let the markets tell us which investments are doing the best, and we buy those investments until the market trends change. I devised a ranking formula that emphasizes medium-term trends. Using short-term trends would cause too much trading.
My original ranking system now is called Classic Mutual Funds. This system follows about 300 largely no-load funds. The funds in the database cover the range of investment styles and options available, so whichever investment is doing best should find its way into the IWW portfolio. It is best to follow this system using a mutual fund program at a discount broker.
The mutual fund scandals of a few years ago and other developments caused many mutual funds to take steps that discourage use of the IWW Classic Mutual Funds system. Redemptions fees for short-term holdings are the most serious change. Most of the system’s holdings stay in the portfolio for less than 60 days. Many funds now charge a redemption fee when these funds are sold, and more funds are imposing fees when shares are sold within six months, one year, or longer.
To adapt, I developed three other aggressive trading portfolios that were introduced this year for you to consider. These portfolios are composed of funds that encourage trading systems such as this one. One portfolio uses only funds from the Rydex family, while another exclusively uses the ProFunds family of funds. The third portfolio uses Exchange-Traded Funds. ETFS are similar to mutual funds, primarily index funds, and trade on the major stock exchanges.
A few rules changes are required for these three portfolios. For example, there are leveraged funds in the Rydex and ProFunds groups. These funds use futures, options, and sometimes other means to amplify the returns of an index. Rydex Nova, for example, is designed to achieve 150% of the return of the S&P 500. That means if the index is down 10%, the fund should be down 15%. For the leveraged funds, I recommend not selling between issues until the fund has declined more than 15% from its recent high.
The IWW rules are listed in this section of each issue.
An Aggressive Portfolio should be considered only by someone who is willing to take more risk to seek higher potential returns. You also must spend more time managing investments. Fund prices must be checked every day and the monthly rankings checked when each issue arrives. Gains are short-term, so investments should be made through a tax-deferred or tax-free account.
An Aggressive Portfolio should not be your entire investment portfolio. I recommend that interested investors put 5% to 10% of total investment assets in aggressive investments.
