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You have studied the idea of momentum or trend following investing, and are convinced that it can work. You understand that it can provide above market returns with lower risk. But the idea of trading funds every few months seems like a lot of work, and you don’t seem to have the discipline to actually follow the trades, or you are reluctant to pull the trigger on making these trades.
There is an alternative that has over 20 years of real time results to back it up, and it’s not an advisory service, but a family of funds that anyone can buy.
We’ve had a couple of articles on the value of using Morningstar Rankings or Ratings to make your mutual fund selections. It is hard to research mutual funds without running into the Morningstar rankings, you’ll find them even on the brokerage sites like Fidelity or Ameritrade. But the research on how effective a tool they are for predicting a funds future performance does not generally paint a rosy picture. We’ve written on that topic of Morningstar rankings in the past.
There are some times when there are no strong sectors for our sector rotation to work with. 2002 is an example of one of those years when nothing seemed to sustain any strength. Those are the times when a sector rotation strategy may still produce returns greater than those of the market, but in a year when the market is down more than 15%, that may be of little comfort.
We’ve written before about using relative strength and sector rotation as our way to find the best Fidelity funds. One simple example is shown in this article about a simple Fidelity Select sector rotation system using just one Select fund at a time. That simple example uses just the one month percentage change in price as the strength metric, and it has done quite well over the years. But it is fairly volatile.
The most common question: How do we make our mutual fund and ETF trading system selections? Ours is a system based on sector rotation using a relative strength. We touch on this in our fund trading course, but we often get asked to supply more information on our systems. Today we will start a small series of postings on just how we select our funds.
Many investors like to use narrow sector index funds as a good blend that captures some of the trending tendencies of individual stocks, but with significantly less volatility as a vehicle for a sector rotation system.