We began looking at the S&P 500. This benchmark continues to be the best representation of how general investments are performing. It is not impossible but very difficult to achieve solid investment returns while ignoring the S&P 500. While looking at the S&P 500 before the crash in 2000, during the crash of 2000 to 2002, the rebound from 2003 to 2007 and the major crash since then we were able to research a wide spectrum of market and economic cycles:
1. Within this time period, investors experienced the best and worst of times. This provided us with a great sample to develop an investment strategy that would work in all market conditions.
2. In every year of this roller coaster period, there were anywhere from 2 to 4 significant moves in the market. A significant move is 8% or more.
3. When the market is not experiencing one of these significant moves, we are “far” better off in safe interest bearing instruments. Not only are we making a few percentage points on our portfolio, we are not losing money which is investment rule #1 and #2 from a famous guy in Nebraska.
Based on these fundamental findings, we set out to develop a strategy that would capture the significant moves in the market, strictly limit our downside, and maximize our returns while not invested. Now you may be asking if this is a timing system. The answer is no. Timing typically involves trying to "time" the tops and bottoms of markets. Our approach is to be in the market most of the time but not afraid to step aside when the risk is too high. The strategy doesn’t involve day trading or even frequent trading as we’ve never seen proof that can be successful. What the strategy does is invest in the market when the market is strongly trending in one direction or another. We are able to do this based on a number of indicators we’ve found and tested to be very reliable. These factors tell us when there is a good chance the market will continue moving in one direction or another for anywhere from a few weeks to many months.
When these factors tell us the market is strongly trending in one direction or another, we take positions in an optimal selection of widely traded ETFs. ETFs offer investors a number of great advantages:
1. They can be bought or sold for as little as $5 through discount brokers.
2. There is no penalty for selling a position in a short time period as there can be for mutual funds.
3. The annual fee for some ETF’s is less than 0.1% while some mutual funds are 2% or more.
4. ETFs now cover most sectors, countries, and about any other investment category you care to invest in.
5. While a stock can lose 50% or more in a day, it is very rare that a non-leveraged ETF loses more than few percent in a day.
Once we take a position in our optimal selection of ETFs, the number of outcomes is quite limited:
1. The trend we were expecting doesn’t materialize and our indicators weaken. In this case we exit our ETF positions and move back to interest bearing instruments. The return in this situation is quite small and either positive or negative.
2. The trend develops as expected and we profit about 6% to 10% with an average holding period of a few months.
As mentioned earlier, the market will experience 2 to 4 significant moves each year for an average of about 3 moves per year. As you can see with 3 significant moves a year and returns averaging about 8% each, earning a few% points while in cash, and an average annualized cost of about 5% when the trend doesn’t develop, we target an average return of about (8% x 3moves +2%interest -5%falsetrend =21%) a year. We won't achieve this return every year but in some years we will achieve more, thus the average.
If you read some of the ads on the web, 21% may not be that exciting to you. After all, there are plenty of opportunities to make 30%, 40%, or more each year. The opportunity is there, I agree. The problem is when that opportunity doesn’t materialize, what is the percentage loss you are handed? I was looking at a popular website the other day and the overall performance seemed quite strong. I then noticed their strategy recently lost over 16% in less than two months. Regardless of market conditions, this isn’t for us and our money and hopefully not yours either. We aim to make about 21% a year while being very patient and even more cautious, year after year.
You may also ask, why not avoid the small percentage loss when the trend doesn’t develop? The very basis of our philosophy is directly related to this. As we tightened the indicators we use to prevent us from entering the market in efforts to miss the times the trend did not develop, we found that we would on occasion miss a significant market move. In short, while attempting to avoid a potential small % loss, we would miss an 8% gain. After much experience, we fine tuned our indicators in order to capture the significant market moves while entering positions as infrequently as possible. Another way to look at this is we could use our indicators to avoid some of the small % losses when a significant trend doesn’t develop but it would cost us more in the long run as we would not be participating in some of the larger market moves. Remember, there are only a few large moves to capture each year. If you miss just one of them, your returns would be approximately 8% less for each one missed.
What does the RetirementX2 service provide? We will email you details of what we are invested in today, our favorite interest bearing accounts, and send you email updates any time we make a change to our investment holdings. You will be in optimal ETF's and in the market when the situation is ideal. Otherwise, you will be in cash at the best return we can find. Every move we make will be delivered to you the evening before we make it.
What guarantee can you offer? We guarantee to exceed your expectations on returns with much less risk than any investment you've owned. Through the turbulent market of the past year and a half, our trends have been right 2 out of 3 and more importantly, our correct trends are triple the size of our incorrect trends. Think about this, we are right 2/3 of the time and make 3 times as much when correct as we lose when we are wrong. A simple math example here is make 6%, lose 2%, make 6%, etc. Say goodbye to hoping the market will be kind to you and say hello to making money in any market. We are confident that our strategy is the best out there and we want everyone who is looking for something more to see proof of this.
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