Trading Indexes Newsletter 2004-1
January 3, 2004
Dr. Ben Buckner, Editor
FTI Returns for 2003 and New Features for 2004
The goals of the three Fund Trading Index System strategies are as follows:
Aggressive Growth method: to be ahead of ALL of the major market indexes at the end of the calendar year.
Moderate Growth method: to be ahead of the Wilshire 5000 index at the end of the calendar year.
Conservative Growth method: to be ahead of the Lipper Balanced index at the end of the calendar year.
The basic rules for the three strategies, used in 2003 were:
Aggressive Growth method: (1-fund hold, any fund, no restrictions)
Moderate Growth method: (2-fund hold, RF under 5, two fund styles)
Conservative Growth method: (3-fund hold, RF under 3, three fund styles, no funds having redemption fees)
In addition, regional/country funds and sector funds were screened out of the Conservative method.
Brokerage-Available Mutual Funds Returns for 2003:
Following are the actual returns for 2003, as accumulated using the Guided Approach, the fund holdings and trades for which are given in the Weekly Reports sent each Saturday. We intend to document the trades in a couple of weeks. In that newsletter, you will be able to see the progress of the system throughout the year in each strategy.
Aggressive Growth method: +60.7% (7 trades)
Moderate Growth method: +41.6% (16 trades)
Conservative Growth method: +47.6% (14 trades)
Market Index Returns for 2003:
DOW Jones Industrials +25.3%
S&P 500 +26.4%
NASDAQ +50.0% (Compare with Aggressive FTI)
Russell 2000 +45.4% (Compare with Aggressive FTI)
Midcap 400 +34.0%
BARRA Value +29.0%
Wilshire 5000 +29.4% (Compare with Moderate FTI)
Balanced +19.9% (Compare with Conservative FTI)
All three FTI strategies beat their respective target indexes for the year, and mostly stayed ahead of them all year. The most impressive return was from the Conservative Growth method, considering that it holds three funds.
Looking Behind and Ahead:
As explained in the book, this system of trading mutual funds started in the mid-1990s, and was applied to only my own funds. It developed slowly until I made an intensive effort to refine the system and write the book in 2001. Back-testing, going back to 1994, with only Fidelity funds and later with brokerage-available funds showed the potential of the system.
The website was made public in January 2002 and the first subscription orders for the book and use of the system commenced in February 2002. The system has now completed two years of "live" application. Our most aggressive system made 17% in 2002, during a year when the market indexes were down from 15 to 31%. Again, this year, we have made impressive gains, being well ahead of goals and the market indexes. But, we are not satisfied. The system has more potential than it demonstrated this year. We made some mistakes, learned from the mistakes, and simply learned more about applying the system. The experience of using the system in "real-time" taught more than back-testing can. It also taught how to conduct the back-testing to give it maximum validity.
Letters from many people have helped me understand how investors respond to this type of system. This year, we have seen challenges forced on us by a few mutual fund companies who traded illegally, which has made it a little more difficult to find good international funds without excessive restrictions and redemption fees. Without getting into great detail, suffice to say that we continue to make minor adjustments. These find their way into small changes in format and in rules. The rule changes are devised mainly to accommodate differences in risk aversion and investor preferences regarding how many funds to hold and how much short-term risk is comfortable. The relaxed rules follow a philosophy of not trying to control users' aversion to risk, and to not allow the returns to suffer by having too many rules. The underlying system and concept has remained unchanged, however -- we simply continue to look at differences in trading indexes once a week, and make trades as differences are observed.
The FTI System using the Brokerage-Available mutual funds with the Aggressive and Moderate Growth strategies got off to a slow start in the first quarter. After reflecting on the first quarter, we did some more work in developing the system. Inspired by a desire to reduce the likelihood that the system would see large short-term losses, some additional back-testing was done, experimenting with various fund styles and limits on risk factors. This led to making some changes in the fund screening methods and increasing the trade signal from a TI difference of 0.20 to a difference of 0.30 around the first of May. The result was very high returns for the rest of the year, with less trading and volatility.
As the year continued, I refined the method of selecting funds and solidified some ideas as to revision in rules. Using the new rules and restrictions as to funds and fund styles, I went back through 2003 and applied them. Basically, this meant applying the 0.30 TI difference all year, eliminating one fund that should never have been used in this system, and applying the relaxed rules we now intend to use for the Conservative Growth method. Doing so, the returns for 2003 would have been:
Aggressive Growth method: +83.2% (4 trades)
Moderate Growth method: +82.3% (8 trades)
Conservative Growth method: +67.1% (10 trades)
The modified rules for the three strategies, which contributed to the higher returns are:
Aggressive Growth method: (1-fund hold, any fund, maximum RF = 4)
Moderate Growth method: (2-fund hold, two fund styles, maximum RF = 3)
Conservative Growth method: (3-fund hold, three fund styles, maximum RF =2)
In this exercise, regional/country funds and sector funds were allowed in the Conservative Growth strategy, as were redemption-fee funds. Of the 10 trades in this strategy, redemption-fee funds were held 5 times, but a fee was paid only once, being 1%. This is one example illustrating that redemption fees are not as important as many people think. If you can improve your returns by 10 or 20% by using them, a few such fees per year are not significant.
The above returns are more consistent with what back-testing showed. Returns were well above the market indexes and trades were only about every 10 to 12 weeks, per fund. I feel we can duplicate this each year, by applying discipline, sticking to the revised rules, and sticking to the current methods of fund selection. Fewer trades have a dual benefit. First, the longer we stay in an upward trending fund, the more is the likelihood of high returns. Too many trades reduce returns. Also, with the current problems in the mutual fund industry causing more restrictions for frequent trading, the less is the likelihood of being caught in such restrictions and/or paying redemption fees.
The above are the rules to be used in 2004 and indefinitely. RF limit has been lowered somewhat and redemption fees are no longer a consideration for the Conservative Growth strategy. Nor do we eliminate certain fund styles for this strategy using the new rules. All of the revisions were made only after a lot of back-testing using the years 1998-2002, and the less "exuberant" years of 2000-2002. We now have stricter guidelines on fund styles and simply will not use certain fund styles and a few individual funds even if they have high trading indexes. Our feeling is that after two years of "live" use, the FTI System, as it moves into 2004 and beyond will perform to its potential.
As you examine the actual returns for 2002 and 2003, few people would scoff at them, but they are not as high as they could have been. That is the point of this discussion. Hopefully, it will give assurance that we can enjoy even better returns than in the past.
Changes for 2004:
Following are a summary of some differences you will see in 2004. Some of these will be observed immediately; the last one will be introduced during the next few weeks, as we are able to complete the required work. The modifications are not separate and distinct. Most of them are interrelated in some way. All are based on evidence (collectively speaking) that they will help to make the system easier to use, result in fewer trades, and make better profits.
1. One display of weekly trading indexes for brokerage-available funds, replacing the three separate displays.
2. Simpler rules for the three strategies (see above).
3. Fewer funds with redemption fees and closer watch on changes in fees.
4. Fewer sector funds and care in selection of regional/country funds to avoid restrictions and high fees.
5. Development of a fund inventory based on both recent past performance and ratings of reputable individuals or entities.
6. An upper limit of 4 on risk factor instead of 5.
7. Redemption fees will no longer be part of the rules for deciding fund choices in any of the strategies.
8. A more relaxed approach to interpretation of rules on selecting funds based on differences in fund style.
9. Development of an additional inventory of funds for the Managed approach.
10. Placing some historical information on the website, including possibly having weekly reports on the website.
Only two variables will be used to distinguish among the three strategies: risk factor and the number of funds held. These will control weekly account volatility, for the most part, and number of trades to a lesser extent. The fact that there should be some diversification among fund styles when two or three funds are held is another factor providing a feeling of lower risk. Users can still, of course, avoid certain fund styles and those with redemption fees. These choices are personal ones and not part of the rules anymore.
As to the third point on redemption fees, it will be difficult having international funds without such fees. We will limit them as much as possible, however. We have all but eliminated domestic funds with redemption fees. Currently there is only one such fund shown on the weekly list, and this one was an oversight. The philosophy here is that if there are several top trending funds without such fees, we do not include any with fees. But if there are few, if any, funds available in a top trending fund style without redemption fees, we include the ones with the shortest redemption fee periods, favoring those with 1% and not 2%.
Not mentioned in the above is gradually eliminating funds and fund companies that have over-reacted to the short-term trading scandals by imposing excessive restrictions and fees. If there are many companies that are behaving rationally, we do not need to use the troublesome ones.
I am trying to promote a more relaxed approach to diversifying among fund styles. Diversification need not require having very distinct fund style differences as some have interpreted this variable. In certain market conditions, you might hold more than one small cap fund, for example. If all of the top several funds have the same style, diversification could conceivably be no more than using funds from three different companies. We do not want to sacrifice returns by dropping too low on the list, skipping over top trending funds, just for the sake of seeing three different fund symbols among our holdings. Some people have been making this least important rule something rigid, when it need not be. This is explained more in detail in the revised "Explanation" section of the website.
Annuities Returns for 2003:
As you know, we display the trading indexes of the Fidelity VIP and VALIC annuity funds each week. I have tracked these for 2003 and compiled the following results. All annuities are reported here using a 1-fund hold, upper limit on RF = 4.
Fidelity VIP: +59.5% (2 trades) 29 funds available, including emerging markets stock and bond funds
VALIC 401a: +35.3% (3 trades) 20 funds available, limited fund styles
VALIC annuity: +44.2% (2 trades) 35 funds available, some diversification into internationals
VALIC 403b: +38.7% (4 trades) 63 funds available, good diversification except no emerging markets
Past Newsletters:
Past newsletters are available upon request. Below is a chronology of developments during 2003. I have highlighted the ones I feel are most important, using an asterisk beside the number.
*1 -- January 4 -- 2002 Returns
*2 -- February 1 -- Strategies and Approaches
3 -- March 1 -- Returns to Date
4 -- March 15 -- Brokerage Fees
5 -- March 22 -- You Ain't Seen Nothin' Yet
6 -- April 3 -- Returns and the Managed Approach
7 -- April 5 -- First Phase of 2003 Back-Testing
8 -- April 12 -- Fund Trading Indexes and Annuities
*9 -- May 3 -- Second Phase of 2003 Back-Testing
*10 -- May 10 -- 2003 Back-Testing of Annuities
11 -- May 17 -- Brokerage Companies
12 -- May 24 -- Memorial Day Freebie
*13 -- June 7 -- Effects of Strategy on Returns, Trading, and Volatility
*14 -- June 28 -- Choices and the Time Value of Money - Part 1
*15 -- July 5 -- Choices and the Time Value of Money - Part 2
16 -- July 12 -- Trades and Returns for the First Half of 2003
17 -- August 2 -- July and YTD Returns and Comparison With the Market Indexes and Goals
*18 -- August 16 -- The Fund Trading Index System: Managed Approach
19 -- August 30 -- August and YTD Returns and Comparison to the market Indexes and Goals
*20 -- September 13 -- Useful Information for Using the FTI System -- Part 1
*21 -- September 20 -- Useful Information for Using the FTI System -- Part 2
22 -- October 4 -- September and YTD Returns and Comparison With the Market Indexes and Goals
*23 -- October 18 -- Trades and Returns through Third Quarter 2003
24 -- November 1 -- October and YTD Returns and Comparison With the Market Indexes and Goals
*25 -- November 15 -- Diversification and the Fund Trading Index System
26 -- December 13 -- Christmas Gift and YTD Returns
27 -- December 20 -- How the FTI System Responds to Mutual Fund Scandals
Invitation to Subscribe:
Newsletter subscribers who are not current paid subscribers to the Weekly Fund Trading Indexes are invited to join the many people who are enjoying market-beating returns this year. Click on www.fundtradingindexes.com , then "Membership", and consider one of the Membership choices. You may want to buy the book (click on book) first, or use the option of buying it and also subscribing for 3 months, 6 months, or 1 year. The book purchase gives you 6 weeks use of the Weekly Trading Indexes so that you can make some simulated trades using the Self-directed approach, and see what we do with the Guided Approach through the Weekly Reports. You may also want to consider the Managed Approach. All three approaches are explained on the web site (go to "meaning" to find that information). The Managed Approach is more thoroughly explained in Newsletter #18.
Ben Buckner, PhD
Creator of the FTI System
support@fundtradingindexes.com