Having just one strategy for buy/sell rules for profitable safe investing doesn’t work. The concept sounds great and many authors give precise advice for how to set your buy/sell rules, but safe investing requires more than putting all your eggs in one basket.
There are many reason why safe investing requires more than one strategy – primarily because of the:
- Diversity of groups or universes of the symbols
- Different means of analysis
Different groups react differently to analysis. Stocks for example, have different movement characteristics than do mutual funds and ETFs. Because mutual funds and ETFs are composites of stocks, their momentum and/or their moving averages are generally different from those of any one particular stock. Mutual funds are also different from ETFs because they are a managed group of symbols that can, and do change in contrast to ETFs which are more set in their composition.
Furthermore, once you have a strategy of signals developed for a particular universe (group), changing that universe changes the dynamics of the group because a new ticker will most likely have a different momentum or moving average than the rest of the group as a whole. This means any change to a group requires new back testing or optimization in order to find the best potential returns on your goals for safe profitable investing.
Different means of analysis come into consideration and rule out having one set strategy for two specific reasons:
- Different types of analysis may work best for different types of groups.
- ETFs usually give the best results when analyzed with the relative strength momentum formula
- Mutual funds provide the best results when analyzed with the alpha formula
- Each type of analysis has variables. Some groups may provide the best return when analyzed over a short, rolling time period while others are more exact over a longer rolling period.
The purpose of your strategies may depend on the type of group you are working with and your objectives for that group. Most mutual fund investments are mid- to long-term periods of a few months to a few years, while stock strategies may be used for weeks, months, or years-the same holds true for ETFs.
Developing a successful long-term strategy requires careful back testing based on your objectives and basic parameters. For example, you may never want to hold a position if it drops more than 9% from a high, so in setting your test you would set 9% as the maximum stop you would allow.
Once you establish your guidelines for back testing you can run a back testing optimization with your personal investment software. You can prove to yourself how changing just one setting of a strategy can affect your overall results. With anywhere from three to eight parameters in a strategy, you can see how making one change might have dramatic effects to your portfolio. Another self-test would be to take a strategy you like and add or subtract a ticker symbol from the group to see how the results are affected.
Developing strategies that meet your goals for each group or universe of symbols is one-time homework for safe profitable investing over the long-term. Once you have your strategies they rarely require change, and optimization need only be done every few years. Even this is not difficult if you have good personal investment software – you just set the variables to be tested, and let your computer and the investment software program do all the work while you enjoy dinner out or a round of golf.
Raymond M.F. Dominick is the author of “Invest Safely and Profitably” (Your Success Guide), available from Amazon.