Asset Allocation, Re-balancing, Big Returns?

I have spent close to 20 years in the financial industry. One of the biggest fallacies is Asset Allocation with re-balancing. For those of you that aren't familiar with this system let me explain. First I am talking about mutual fund Asset Allocation. The funds are divided up into types of funds, for example aggressive stocks, conservative stocks or balances funds that contain both stocks and bonds. There are a lot more divisions than those. You could have small cap, med cap etc. When you go to your investment advisor you answer a few pages of questions and your advisor comes up with a model of how much money you should put into each fund that the computer comes up with. Each slice of the pie has to contain the same proportion of money all along the way. For instance your portfolio could have 50% of one fund, 30% of another and, finally, 20% of the last fund. There could be more than three funds. You invest your money then you are off to the races, but wait there's more. About three months down the road it's time to make sure that all the funds are in the proper proportion to each other. Let's say that the funds now are 40%,50%,10%. The then the investments with too much in them have to be sold and the investments with too little have to buy. Your money is shifted and there may be a fee for that. Here is what I perceive as a problem. If you have a fund that is performing well and it grows you are selling some of it to buy another fund that may not be performing as well. Yes you are preserving your diversification and proportions, but you are also inhibiting your returns. What I have seen is that the returns from these types of investments are anemic and unless you have a substantial amount of money you aren't going to make much. My contention is this; Spend $29.00 and get the Pro 6 System. Shoot, you probably spent that much on Big Mac's last week. Spend some time doing your homework and participate in this blog. This blog is public at the moment, but it won,t always be that way. I currently have close to a 60% annualized return on my investments and I only check it once a week. I have the freedom to go about my life. Do I need to say it? Email me NOW!

Blog Closing

This blog has been temporarily been opened to the public. I will be closing it shortly after the grand opening.

Tweaking the Switch Ruler

I discovered that the Switch Ruler, next to the “SWITCH/HOLD” cell was giving me a number that didn’t make sense. The cells that actually carry the “Target” shares and the “Current Shares” were showing a switch was one share away and the Switch Ruler was showing a zero. I realized the the formatting was for whole numbers and the cells were producing fractional numbers. I adjusted the “Switch Ruler” to show one decimal place and that revealed a better picture.  The result:

 

Two Switches At The Same Time

Occasionally I will have to switch opportunities at the same time. Other than flipping a coin,  I have often thought of how to solve this dilemma without getting back into a research mode on the best pick. The first think I do, now, is increase the switch percentage to see if one of the switches is eliminated. If it works then I make the surviving switch and return the percentage back to my original selection. What are your solutions?

User Manual Pro 6 Investment System

Instruction Manual for Pro6 Switch.

You are going to have to clear your mind when considering this investment system. It doesn’t turn the world upside down, but looks at things in a new light. Pro Switch 6 works best and has the least amount of risk when using mutual funds. The second part of that is sheltering the investments from taxes. That is why I use this system in a 401k or IRA plan. You could be buying and selling your investments every three months.

I just want to make a point now that I will make several more times. THIS IS NOT A BUY LOW, SELL HIGH STRATEGY. It may work out that way some times, but that is not the purpose. I am trying to multiply the number of shares that I own now from the same fund I owned in the past past.

You may be familiar with the term “Horse Trader”. The principle of taking something you have and trading if for something you need or that you can trade again to get something you need. I have applied this to mutual funds. This system treats mutual funds like something to be used. It’s a thing, not a beloved investment. When one fund is better (“better” will be defined later) than another then you get into that fund. The decision is automatic. Our spreadsheet will indicate when the opportunity is present.

Here is the principle of how the system works. Getting more shares is the object. I have found that having high quality mutual funds reduces my risk. Each fund has a number of stocks that is watched over by a fund manager or managers. They hold a portfolio of stocks or bonds that diversify my risk. Now I can be less concerned about losing my money because of the investment going broke. With that behind me I can now consider how to increase my wealth. What I have found, through experience, it that multiplying the number of shares and letting the price of the shares take care of itself becomes amazingly profitable. This means, here it comes again, that I am not using the buy low-sell high method. As with any investment system, there is always the possibility of the market going down and the investor losing money.

THE CONCEPT

Farmer John had $100 dollars to spend. He had three choices of live stock, horses, Pigs and Chickens. He first went to the horse farm and found that the horses were $50.00 each. He could get two horses for that price. He wrote that down in his notebook. Next he went to the pig farm. He found the pigs were $25.00 a piece. He wrote down “four pigs for $100.00. Finally he went to the chicken farm. Chickens were $10.00 a copy, again he recorded it in his notebook. Farmer John contemplated what would be the best deal. He checked around with other farms and knowledgeable people and found that the chickens were the best deal. He bought 10 chickens and wrote it down. A month went buy and he found that he could trade his chickens for five pigs, but he could only get two horses. So he traded his chickens for five pigs. The next month he found he could not better his position. He could only trade for 8 chickens or one horse, so he bided his time until he was able to get more chickens or horses. He did this until he had a boat load of animals and he sold them for cash. He was admired by his friends and retired.

The system calculates the switch opportunities. It is a tool that will tell you when it is time to buy or sell. It may give you more than one opportunity. One thing you have to keep in mind is that the system requires that you keep all your money in one fund at a time. This is not an asset allocation model. You are fully invested at all times in one fund.

One thing you can’t control is the Mutual Funds in your 401K or IRA. If you have a group of funds that track each other pretty closely then your returns will be affected. There will be some judgment calls you will have to make from time to time. Which fund will you start with? If you are presented with two “buy/sell” opportunities which one do you take. Start with the fund you think will have the most upside potential. This is the only time you will be using the Buy Low/Sell High practice on your own. After that the system takes over. When the system gives you two buy/sell opportunities I tend to go for the biggest increase in shares.

Let’s go into a brief description of how this would work. The first step is to “Benchmark” your investments. Farmer John wrote down the cost and how many animals he could purchase with his $100.00. You must do the same. It is an old adage that you must know where you are at before you know where you are going. If you don’t know how many shares you would have had at the beginning you will not be able to calculate the switch points. In other words you have to get everyone to the starting line to size them up. On day one, the day you initiate this program you need to see how many shares each fund would yield if you put your entire investment dollars in. Here is an example:

You have a total of $10,000 to invest.

Fund A @ $10.00 a share = 1000 shares.

Fund B @ $5.00 a share = 2000 shares.

Fund C @ $20.00 a share = 500 shares.

Fund D @ $2.00 a share = 5000 shares.

This is your benchmark. You will pick one of these funds to be your starting investment. All your funds allocated for this program will go into one fund.

What I like to do is hold ongoing contributions separate from the fund I am invested in. Having them go into a money market or cash account. Then when a switch opportunity occurs I move into the fund indicated and put the cash in with it.

Remember investments fluctuate you will have good days and bad, but with time there will be more good days. Let’s use the Benchmark example and create a scenario. I have looked at the mutual fund selections and decided to start my investment program with Fund C. I get 500 hundred shares and I track the progress of the shares as often as I want. I usually don’t do this more than once a week.

Jan 1st Fund A Fund B Fund C Fund D

1000 shares 2000 shares 500 shares 5000 shares

So track this through the Mutual Fund Pro Switch IV program and after a month I see that the program tells me there is a switch opportunity. I can now switch to Fund A and get 1200 shares. Many things could have happened to present this opportunity. Fund A shares could have dropped, Fund C shares could have gone up or both. They could have both gone down and Fund A just took a bigger dive. They both could have gone up and Fund C went up significantly more. This is why it is not a buy low, sell high system. So you might ask, if Fund A is going up why not stick with it. Well you could, but now you are back to the buy low, sell high scenario. I would say if you are going to Florida you don’t take the road to Chicago just because it’s moving faster. If you have a system you stick with it.

Before you get started you must download the Microsoft Stock Quotes for excel. Without this your system won’t work. http://office.microsoft.com/en-us/excel/FX100487621033.aspx

If you are running Excel versions later than 2002 you may have to install MS Office compatibility pack here http://support.microsoft.com/kb/923505 .

There is one more element that will give you some control. You can select the percentage of share increase that triggers the notification for a switch. You could say 3%, 7% or more. Those would be the minimums many times the percentage of new shares is more. The smaller the percentage the more aggressive the switching.

FUND SELECTION

This is the foundational building block of the system. The proper selection of funds for the system is very important. The best funds to use are those that don’t tract each other identically. If you have funds that follow each other up and down closely your returns will be diminished. In theory, it would be better to use funds that move in opposite directions or are divergent. The system would work if you had one fund that fluctuated wildly and another that was relatively stable. It would be wise to chart the funds you are considering and compare their performance. I use Yahoo Finance to put several investments on the same chart.

I would suggest you spend a lot of time on this operation. You could do a dry run by using Mutual Fund Pro Switch with the funds you have selected before doing any actual trades.

NUTS AND BOLTS

Below is a screen shot of one of five tracking windows. The green cells are areas you can change, such as stock symbol. In this case

“REZ”

In order for all this to work you need to install the Microsoft Quotes add-on for excel. The spreadsheet will not function without it.

Just below it is the switch percentage target. In this case when the number of shares increases by 3% the system will call for a switch. You can put any number you want in that cell. In this scenario we are on “HOLD” and “3” shares away from a switch. In the window below the system is calling for a switch. The “(1)” indicates that you have met the criteria for switching plus one share. You can see that by looking at the cell below “Target” and the cell below “New Shares”. “New Shares” would be the number of shares you would get if you moved into that investment.

The investment name is automatically filled in from the symbol you enter. To the left is a cell with “NOT CURRENT”. This cell has a drop down menu feature. The selections are “CURRENT” and “NOT CURRENT”. Choose “CURRENT” for the investment you are currently in.

Below that is a section to keep track of your Benchmark, to start with, and recent switches. It isn’t necessary to keep track of the target shares. The first cell under “Target” is locked and cannot be changed. In the above case we have recorded 21 shares at $94.55. This could have been a benchmark (the info you recorded on day one for all investments) or an actual purchase. When your next switch is called for. Move the “Date”, “Share Price” and “Shares” to the bottom row then fill in your new position in the top row. Keeping track of your past purchases is up to you. It does help you track your progress.

Underconstruction

We will be posting the User Manual for the Pro 6 Investment System, soon.