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Tutorial

Self-Directed Approach

General Rules and Procedures

The general procedures. Trading indexes (TIs) are updated and displayed on our web site sometime after the close of the markets each Friday. The user examines them each weekend. Decisions are made to buy, sell, trade, or hold following the general rules and procedures discussed below, and any changes to an account are made before the market closes on the following Monday.

If Friday is a market holiday, the TIs are provided sometime after the close of the market on Thursday. If Monday is a holiday, any changes to accounts would be effective on Tuesday.

The first step. Using a 1-fund approach (the simplest), a person starts using the FTI System by buying the available fund having the highest current TI, provided one has a positive TI. If the funds you currently own have TIs lower than that of the one having the highest current TI, they should be sold and that top fund purchased with the money. If your funds do not appear on our current list, they probably either have TIs lower than those on the list or they are not considered in our system. We screen funds and include only those meeting certain criteria (see Funds.) If no available fund meeting our criteria has a positive TI, including the funds you currently hold, the money goes into (or stays in) money market.

If you are uncomfortable making sudden moves, they can be made over a period of time, but there is no long-term advantage of doing so. Many users of the FTI System may prefer to hold more than one fund at a time, which is a less aggressive approach. The system researched and described in Using Mutual Fund Trading Indexes keeps the investor in only one fund, for reasons explained in the book. There is nothing particularly wrong with holding more funds, but it can become more complicated as it can increase the number of trades and the total time in managing accounts. There may also be slightly lower profits by doing so, depending on how much the best fund outperforms the close contenders. These points are more thoroughly discussed in the book.  We do not recommend holding more than four funds in an account at a time. The procedures for using two funds are detailed at the end of the tutorial. This tutorial is based on the one-fund approach.

Example -- Second half of 1998

Table 1 gives data for five funds. Four of these were good performers for most of the period. They are somewhat diverse in their investment styles, there being two funds heavily weighted in technology (one mid cap, one large cap), a growth & income fund, a pure value fund and a value/growth hybrid fund. The Value fund is included for the purpose of illustrating how a poorly performing fund is not considered as a "buy" or "hold" because its TIs are consistently lower than the other choices. During the research and testing of the FTI System, all of Fidelity's non-select funds were considered, approximately 75 or 80 total. TIs were calculated each week for a much larger group of high performing funds than are shown. Only the five are shown, in the interest of saving space and making the example easy to follow.

This period of time was chosen because it illustrates all of the decisions, namely buy, sell, trade, or hold, it demonstrates the application of the general rules and specifications on TI differences, and it illustrates the advantage of being safely in money market during an overall bear market of even a couple of months. The TIs are shown in Table 1 for each Friday. Other than the starting date at the end of June, the decision dates for changes were August 7 (sell), October 16 (buy), November 27 (trade), and December 11 (trade). In reality, decisions were made on all other weeks as well. Those decisions were to hold.  The one-fund approach is used for simplicity.

View Table 1

June 26 – Decision to HOLD the Fidelity Fund

If you had been using the FTI System prior to this date, this fund would have been the fund held at the end of June based on the fact that its TI is the highest of those being compared and it is positive. If your money was in money market (cash) or some other fund at that time, you would buy Fidelity Fund from the cash account or trade the fund you were holding for this fund sometime after June 26. We will assume the investor was already holding Fidelity Fund, and that 3,000 shares were owned. The June 30 price is used for computing the value of the account at the beginning of the second half of the year. This is shown in Table 2.

August 7 -- Decision to SELL Fidelity Fund (move to Cash)

From June 26 through July 31, the TI of Fidelity Fund remained above those of the other funds and remained positive. However, on August 7, it dropped to -0.10. This matched our specification of -0.10, the SELL signal. Had there been another fund with a TI at least 0.20 greater than this, we would have traded to that fund. Even though the TI of OTC is positive, it is only 0.01 and thus not high enough to meet this specification. It would have needed to be at least 0.10 to make the required difference. Since there are no other funds with positive TIs, the only option using the FTI System is to move the money to a money market fund. Fidelity's Cash Reserves is the fund used here. The sale is made on Monday, August 10. The computations for the transaction are shown in Table 2.

Note that a $1.46 dividend/capital gain was distributed to the Fidelity Fund on August 7. This increased the number of shares from 3,000 to 3,132.768 before the fund was sold on August 10. The drop in TI was caused by market factors, not the drop in the share price due to distributions of dividends and capital gains. TIs are unaffected by such distributions.

October 16 -- Decision to BUY Dividend Growth

For the nine weeks from August 7 through October 9, the TIs of all funds remained negative. Therefore, the money remained in Cash Reserves. But, then, on October 16, after ten weeks in Cash Reserves, some TIs became positive, the highest being that of Dividend Growth at 0.23. So, the decision was made to buy the fund using the money in Cash Reserves. This transaction was made on Monday, October 19. During the ten weeks hold of Cash Reserves, the money was earning about 5.3% (annual rate), and hence the gain of over $1,000 during that time. See Table 2 for the calculations to this point.

November 27 -- Decision to TRADE Div. Gr. for New Millen.

Toward the end of the five week period from October 16 through November 20, the TI of a couple of the funds exceeded that of Dividend Growth, but not by the required 0.20, so Dividend Growth was held during the period. Then the TI of New Millennium surpassed that of Dividend Growth by 0.22 (being 0.98 minus 0.76) on November 27, and so the decision was made to trade Dividend Growth for New Millennium. This trade was made on Monday, November 30. The account is updated in Table 2. For the purposes of this example, we will assume New Millennium was not closed to new investors.

December 11 -- Decision to TRADE New Millennium for OTC

The hold of New Millennium was brief, but we abide by the signals and rules and traded it when the TI of OTC exceeded that of New Millennium by more than 0.20. Note that the TI of Over-the-Counter (OTC) was greater than that of New Millennium the week before, but not by 0.20 and so no trade was made then. The trade was made on December 14. The TI of OTC remained above those of the other funds for the rest of the year and so we end the year with all of our money in OTC. This final transaction and the account value at the end of the year are shown in Table 2.

TABLE 2
Fidelity Fund Trades
Second Half of 1998
TUTORIAL EXAMPLE

Dividend distribution on Fidelity Fund on August 7.   See text for explanation.  

6-MONTH EARNINGS