When is the best time to invest in mutual funds, or the stock market in general. Because of the redemption fees on mutual funds, it can be harder to use market timing to manage the risk in your portfolio. But there are some seasonal influences that can be used to your advantage to help you decide when it’s best to invest in mutual funds, and when to go to cash.

What do farmers and airlines know that you don’t?

So far in our series on managing risk we’ve taken a look at market timing and portfolio diversification as two powerful techniques to control risk in our mutual fund portfolios. In this article we’ll take a look at the third and final one: hedging.

In previous articles we covered the possible advantages of hedging your portfolio as another way to reduce risk. This time we will cover a method to do exactly that using only mutual funds or ETF’s that can be purchased in a cash brokerage account.

Historically to hedge you had to sell short shares of an ETF that tracks the market, like SPY or QQQQ, or to buy put options on the major indices. The problem with that is that it requires a margin account, which eliminates most retirement accounts, and many retail accounts. Plus many people have this innate fear of short selling, and are concerned that they could lose more than they invested if the markets were to take off.

Recently we’ve gone series on risk management for our portfolios, it seems that it would be interesting to go back and look at how much you need to retire if you apply some of these techniques.

The full story on the assumptions behind the conventional wisdom can be found at our previous article on how much you need to retire.

Fidelity does sponsor an ETF, but the most common way to trade ETFs at Fidelity is through the brokerage arm. Let’s take a look at the Fidelity ETF.

Many fund families have gotten into the business of creating/ sponsoring ETFs. It would seem like a natural move for them, and they did start the process back in 2003 with the Fidelity Nasdaq Composite Indes Tracking Stock (ONEQ is its trading symbol). This is a simple tracking stock, and it has no real distinctive reason for being.

One of the earliest examples of stock market timing was the Dow Theory. Dow Theory Market timing is actually pretty straightforward, but it’s complicated a little by the variations that have been added to it over the years. Here’s a quick history of the Dow Theory timing system, and where to find information on trading it today.

We would all like to have some edge when it comes to the markets. We have discussed some stock market timing approaches as one way to mitigate the market risk. However, one limitation almost all these market timing systems have is that they are the result of some type of backtesting or simulation. The result is that while it may look good on paper, it’s difficult to have much confidence in their real time performance until they develop something of a track record.

We are constantly on the lookout for ways to both diversify our portfolios, while simultaneously improving the risk adjusted return. ETF’s have many advantages over traditional mutual funds, e.g. the ability to trade interday, no early redemption fees, low cost structures, and are not typically tied to the track record of an individual fund manager. This last advantage is a result of the fact that ETF’s are typically set up to track some type of passive index, limiting the ability of a fund manager to add (or subtract) value with his stock picking abilities.

If you’ve ever looked what kind of nest-egg you are going to need to retire, you’ve undoubtedly come across the standard rule of thumb only allows withdrawing 4% a year if you want to have your savings last at least 30 years.

So if you wanted to start withdrawing $80k a year, you would need to have $2 million dollars in savings. Now that is a mighty sum, and many may consider it out of reach, especially if you are starting late in the game.

In some other articles we discuss the impact that risk can have not only on your ability to invest with a system, but highlighted the fact that the risk of the portfolio can have more impact on the sustainable withdrawal rate than the actual average rate of return.

Sector rotation and trend following are interrelated parts of most successful trading strategies. As we all know, 2008 was a tough year in the market. But trend following allows you to follow trends down as well as up, so it could be successful in bear markets as well. Here’s a look at a study of trend following returns for 2008.

In another article we looked at managing risk (as measure by the standard deviation of returns) by combining funds in our portfolio that were uncorrelated, (that is they don’t track each other very well on a day to day basis.)

How does this work out when applying it to a typical mutual fund portfolio?

Let’s start by taking a quick look at one of the standard examples.

Here we take a look at techniques you can use to build our best diversified mutual fund allocation, which helps manage the risk in your mutual fund portfolio.

In other articles we found that using uncorrelated funds assembled in a portfolio gave us a powerful tool to manage risk, while maintaining good portfolio returns.

Finding the best mutual funds for diverifying your portfolio is a little tricky these days. If you’ve done any reading or watched any TV on the topic of investing, you’ve undoubtedly run into the topic of diversification, and heard how important it is.

It’s often the only real form of portfolio risk management that is generally recommended in the popular press, but it seems to often that folks write about it without really comprehending what makes it work. While the math can get complex, the basic ideas behind diversification are simple enough to follow.

In another article we discussed measuring risk using standard deviation. Here we will spend just a little more time to introduce the magic of statistics and how understanding standard deviation and other simple statistical measures can reduce your portfolio risk.

What is correlation? Simply put, it’s a measure of how closely two investments track one another. The unit of measure is the correlation coefficient, which can vary in magnitude from 0 (not correlated at all) to 1 (exactly tracking).

Penny stock get a lot of press, especially in rising markets. What is a penny stock, and how do you invest in penny stocks?

For US investors, a penny stock is typically thought of a common stock that is currently trading for under $5 a share, and is not on one of the major stock exchanges, but is traded over the counter ( aka OTC) and quotes are provided through the Pink Sheets or the OTC Bulletin Board. Typically, stocks listed OTC tend to have low market capitalization (basically the total value of the entire companies stock) and don’t have a lot of trading volume (are “thinly traded”). Even if there is a lot of share volume, since the price is so low there is not a lot of dollar volume. This in itself can lead to a lot of volatility in the stock price.

This sector fund trading system uses a strategy of sector rotation that only trades one fund at a time from the Fidelity sector funds (the Select Funds). It’s performance is pretty good overall, although it tends to have drawdowns at least as deep as the overall market.

The overall stock market has had a run of flat performance over the last several years. If you look at the performance of the S&P 500 from 1999 through 2005, you’ll see that it was up about 0.2% compounded annual return, not much better than a money market fund, and the Nasdaq 100 has fared even worse. Granted, it got there in an interesting way, but overall it basically went nowhere.

Originally published in 2006, investing like Buffett BRK has fared better over the last 3 years, as in the 3 years 2006-2008 BRK was up about 8% total (still a little worse than a money market fund) the S&P 500 did a lot worse, losing about 29% in that same period of time.

One of the most common pieces of investment advice is to find a good investment and to simply hold on to it. Known sometimes as buy and hold investing, it doesn’t seem to be working as well as it once did. A common response of buy and hold advocates is to point to the success of some of the famous value investors. The most famous of the contemporary value investor is Warren Buffett.

This article on hedge mutual funds was originally published in 2006. Many of these hedge funds have done reasonably well in the recent market tumult, and it may be time to look into these funds again.

In today’s volatile markets we are always looking for ways to increase our portfolio returns while limiting the downside risk in our investment portfolio as well. There are many more options to do so than even just a few years ago. One recent development are mutual funds that are not structured like typical long only mutual funds. These are funds that don’t invest solely in stocks and bonds.

We get a lot of questions about the best funds to build a well diversified portfolio. There are many factors that go into it, but here is an article we published that describes one way to identify some good candidates. This article builds around the Fidelty funds, but the same approach can be used to select ETFs to get many of the same benefits.

Almost any article in the popular press about building an investment portfolio is quick to advise that you need to build a diversified portfolio. You then get some rule of thumb about buying stocks and bonds, or you need to buy 8 stocks from different industries, or you need 5% in precious metals or international stocks.