Results of the Fund Trading Index System

Back-testing for the book Using Mutual Funds Trading Indexes was performed using only Fidelity funds (see results below). In early 2003, a more sophisticated system of back-testing was developed, as compared to that employed in 2001 using only Fidelity funds. Many combinations of funds and fund styles were used for this later testing, with various constraints on risk factors, and no restrictions as to fund company. The following table represents a result of the testing, using the Aggressive Growth method (one-fund holding, any risk factor, etc.). The account value on December 31, 1997 is assumed to be $100,000.

	FTI System	DJIA	S&P 500	NASDAQ	Russell 2000
1998	97.2%	18.2%	28.7%	39.6%	2.5%
1999	120.3%	27.2%	21.0%	86.1%	21.3%
2000	21.4%	-4.7%	-9.1%	-39.2%	-2.9%
2001	20.1%	-7.1%	-13.0%	-21.1%	1.0%
2002	13.7%	-16.8%	-23.4%	-31.5%	-21.6%
Annualized	48.4%	2.1%	-1.1%	-3.1%	-0.9%
Accumulated	$720,000	$111,000	$95,000	$85,000	$96,000

The problem with testing for years much earlier than 1998, using the "Brokerage-Available" universe of funds, is the lack of complete and accurate information on funds. The necessary information on the Fidelity funds was available through various publications, but it was not for the thousands of other funds. The farther back in time we attempt to test, the less confidence we have in the results. We feel confident about the 1998-2002 testing with the larger fund universe, in that there is more recent information and good repeatability in results.

Back-Testing With Fidelity Funds Only

	FTI System	DJIA	S&P 500	NASDAQ	Russell 2000
1994	16.4%	4.9%	1.3%	-3.2%	-3.2%
1995	45.5%	36.7%	37.6%	39.9%	26.2%
1996	34.8%	28.7%	22.9%	22.7%	14.5%
1997	29.5%	24.9%	33.3%	22.2%	22.4%
1998	30.1%	18.2%	28.7%	39.6%	2.5%
1999	201.1%	27.2%	21.0%	86.1%	21.3%
2000	-3.8%	-4.7%	-9.1%	-39.2%	-2.9%
2001	15.8%	-7.1%	-13.0%	-21.1%	1.0%
Annualized	37.7%	15.0%	13.8%	12.3%	9.6%
Accumulated	$1,290,000	$307,000	$281,000	$253,000	$209,000

The account value on December 31, 1993 is assumed to be $100,000. As can be seen, the FTI System returns more than quadrupled what would have been earned in any buy-and-hold system using market indexed funds. Even without the phenomenal return of over 200% in 1999 (due primarily to a long hold of the Japan Small Companies fund), the FTI System, with Fidelity funds, would still have nearly tripled the eight-year return of any of the major market indexes. However, if the returns of any of the years 1998-2001 are compared for the application using only Fidelity funds and brokerage-available funds, it can be seen that the use of brokerage-available funds usually yields better returns. This is because using a larger universe of funds increases the probability of having the top trending funds available.

During 1994-2001, there were a total of 46 fund trades (an average of one about every nine weeks -- fewer than 6 per year) using Fidelity funds. Very few short term redemption fees were paid. The number of trades using brokerage-available funds is approximately the same.

Complete documentation for the eight years of Fidelity trading is given in the book.

Comparisons With Other Fidelity Systems (1994-2001)

Comparisons with advisory services who specialize in Fidelity funds are documented in the book. Basically, these other services showed earnings comparable to those of the market indexes shown, their accumulated returns ranging from $212,300 to $257,400, which corresponds to a range of 9.9% to 12.5% annualized return.

An asset allocation model of Fidelity funds held continuously for the eight years was also used for comparison. This model was comprised of 20% Growth Company, 20% Dividend Growth, 20% Value, 20% Investment Grade Bond, 10% Diversified International, and 10% Cash Reserves. The comparison of our 37.7% gain to the 12.5% gain of this model demonstrates the superiority of our system over a typical, fairly aggressive growth model intended to yield good returns over the long term.

Tests have shown that the system might struggle to make profits during two market conditions: (1) trendless or "sideways" markets (no leadership in any fund style), especially when high volatility exists; (2) all fund styles trending upward but in close parallel, (no clear superiority of one or more of the fund styles). Market behavior through much of 2002 represents the first condition fairly closely. However, during these months, we identified trends that went against the major market indexes and enabled the system to produce positive returns. One international fund as well as treasury bonds, and one or two sectors diverged for two or more months at a time, which was enough to produce profits well above the negative returns of the stock market indexes. Market behavior during 1996-97 represents the second condition. However, even then, there were a couple of fund styles that diverged from the rest (see Chapters 9 and 10 of the book). If by chance either of these two conditions prevailed over a long period of time, we might not see extraordinary returns such as those in the above table.

Like any technical system applied to something as unpredictable as the stock markets, this system will experience losses that could extend over periods of several months. But, the person who stays with the FTI System can enjoy excellent results over the long term, as the returns in the above tables indicate.

In 2002, we used what we called a "Basic Approach" and a "Value Approach", each with one to three fund holdings. These results, which are actual, and not back-tested numbers, are as follows:

One-Fund Basic System	+17.1%
Two-Fund Basic System	+2.0%
Three-Fund Basic System	+7.3%

One-Fund Value System	+5.1%
Two-Fund Value System	+12.2%
Three-Fund Value System	+3.9%

Recall that the major market indexes were down from 16.8% to 31.5% in 2002.

Newsletter: FTI Returns for 2002

Newsletter: FTI System Trades for 2002

In 2003, we used three strategies (methods): Aggressive Growth, Moderate Growth, and Conservative Growth. The user of the Aggressive Growth method holds one fund at a time, the user of the Moderate Growth method holds two funds at a time, and the user of the Conservative Growth method holds three funds at a time. The limits on risk factor vary among these three strategies, the more conservative using less volatile funds. Returns for 2003 were:

Aggressive Growth: +60.7%

Moderate Growth: +41.6%

Conservative Growth: +47.4%

If only one or two changes were made in the fund inventory, and using the current trading signal of 0.30 TI difference all year (raised from 0.20 in May), the returns for the Aggressive and Moderate Growth strategies both proved to be over 80% and that of the Conservative Growth strategy was over 67% for 2003. We have since made some important changes in the way funds are selected, eliminating the type of funds that contributed to the lower returns shown. This puts the system in a position to make returns even more above the market indexes than what we enjoyed in 2003. The back-tested returns for 1998-2002 employ the type of fund inventory we are now using. Nevertheless, even without these refinements, the Aggressive Growth return shown above was over 10 percentage points above any of the market indexes (NASDAQ was highest at +50.0%) and the other two strategies were also well ahead of their respective goals for the year.

In 2004, we used the same three strategies used in 2004: Aggressive Growth, Moderate Growth, and Conservative Growth. Returns for 2004 were:

Aggressive Growth: -16.8%

Moderate Growth: -1.7%

Conservative Growth: +1.1%

Most of the losses with the brokerage system occurred in the first half of 2004, when the market was sideways, yet had a lot of short-term volatility. The FTI System can under-perform under these market conditions. The bulk of the losses occurred with a few highly-volatile funds. As a result, the Aggressive Growth method suffered the most. In addition, brokerage companies were placing trading restrictions on what they deemed as "market timing", further complicating trading. In response to these actions, we began tracking separate TI lists for three individual fund companies: Fidelity, T. Rowe Price, and Vanguard. Those wanting to avoid the hassles of a brokerage account can open a mutual fund account directly with one or more of these fund companies and use these TI lists for trading decisions. From past back-testing with Fidelity funds, we found that this limited universe of funds still yield superior returns. See the section below for 2004 returns in the three fund companies.

We began tracking Fidelity, T. Rowe Price, and Vanguard TI mutual fund in June, 2004, so the returns represent back-tested returns through June and actual returns from July through the end of the year. Most of the gains occurred after June. We used the Aggressive Growth method for each of the portfolios. These portfolios performed considerably better than the brokerage-available portfolios in 2004.

Fidelity: +19.9%

T. Rowe Price: +7.6%

Vanguard: +7.6%

In 2005, we stopped tracking the guided approach for the moderate and conservative brokerage strategies and began emphasizing a more personalized approach. From the brokerage list, we tracked a 1-fund portfolio. From the mutual fund accounts, we continued to track a 1-fund portfolio in each of the Fidelity, T. Rowe Price and Vanguard TI lists. We used the Aggressive Growth method for each of the portfolios. Our average return for the 4 portfolios was ahead of most major market indexes.

Brokerage: -6.4%

In 2006, we continued with the same approach from the previous year of tracking hypothetical trades for a single-fund brokerage-available portfolio in addition to a 1-fund portfolio for Fidelity, T. Rowe Price and Vanguard. Our average return for the 4 portfolios was 12.1%.

Brokerage: +16.7%

We continue to track a 1-fund portfolio for brokerage-available, Fidelity, T. Rowe Price, and Vanguard TI lists, with only very minor changes in rules and other changes in fund inventory intended to assure that the system reaches its full potential. Returns for the current year for these methods as currently tracked in the "Guided Approach" are shown in the reports available to members, and occasionally given in the free newsletters. Also, we cite the trades in newsletters at least once per year, so that every detail of the claimed returns can be documented and checked by anyone who has been following the system. There are no "secrets" as to how the claimed returns are achieved.

Disclaimers

There is always risk involved when investing in mutual funds, both in the long-term and in the short-term, using any technical or other system. We cannot guarantee that past results of applying the Fund Trading Index System will be duplicated in the future or that returns will always be ahead of the major market indexes. We cannot guarantee that all data on fund sales and redemption fees are accurate. We are not directly associated with any fund or brokerage company. All performance figures assume re-investment of all dividend and capital gain distributions. We assume no responsibility for misuse or misinterpretation of the rules for using the FTI System.

We intend to provide at least 50 updates of TIs each year. It is possible that one or two weeks could be skipped each year, due to technical or other problems.

FUND TRADING INDEX SYSTEM RESULTS

Back-Testing With Fidelity Funds Only

Comparisons With Other Fidelity Systems (1994-2001)

Disclaimers