Market Based Investing

   As we saw in 2000-2002, buy and hold "investing" is a large bet GAMBLE no-one can afford.

   Buy and hold for the "long term" conforms to tradition and authority.  Buy and sell decisions are based on personal convenience, routine, predictions, rumors and news.  Being successful requires being lucky enough to sell at high prices.

  Market Based Investing accepts the Market as the only authority on the market.  The only tradition is, "buy low, sell high."  Since the trend of prices is the only determiner of profitability, price is the only basis for determining when to buy and sell, i.e. market timing.

  Of course, "market timing" has a bum rap because vested interests want to keep control of our money at all times.  The always-smiling media  personalities play along to sell advertising.

 Unfortunately, "You can't time the market," is given credibility

because few services or systems  consistently beat the indices -- without the aid of well chosen stocks/funds.  (See The Hulbert Financial Digest.)

  Furthermore, it is difficult for investors to find the best systems because performance reports are inadequate.  For example, few high performing services want you to know how much a portfolio has agonizingly fallen in value in order to achieve gains. 

  Finally, once a diligent investor has found a system worthy of trying, most of us don't have the patience to stay with it when inevitable inefficiencies occur.  Instead, we tend to chase after the latest "hot" system -- often right before it turns cold.

   Having learned these lessons the hard way, I realized that following the market is more profitable than predicting it.  And the best trend following tools:  1) Include momentum and volatility formulas to reduce whipsaws; and 2)  Include multiple, objective signal definitions to adapt to a variety of market conditions.

  But even the best of trend I.D. systems calls for investors to:

1)  Use systems which are performance tested for decades.

 2)  Require above average performance in all key criteria, e.g. "percentage winners".

 3)  Select currently stronger than market stock funds or ETF's.

 4)  Limit the size of the investment to what is personally appropriate.

 5)  Match investment choice to the relevant market timing system.  (E.g.  Don't use a S&P 500 based system for trading mutual funds tracking with the NASDAQ.

 6)  Diversify the portfolio in the most important way -- different trend systems for different portions.

 7)  Exercise discipline in system usage, except...

 8)  To avoid losing more than you can afford, use protective stop loss percentages appropriate to personal comfort zones and financial circumstances.

Maximum Drawdowns

  Maximum Drawdowns measure risk.  The drawdown from a peak measures the historical maximum drop in portfolio value.  That can include a series of losses.  The drawdown from entry refers to the worst loss that would have occurred if selling at the lowest price since buying.   The maximum real drawdown is the drop from a high price to the sell price.

   A good market timing system will greatly reduce drawdowns.  For example the Moneyflow OTC System backtest shows the 44 year maximum drawdown on the NASDAQ Composite being reduced from  78% to 14.7%, long trades only.  (Our original system was redesigned in 2003-05 due to drawdowns being too large to be user friendly.)

Year-by-Year Performance

   Year-by-year gains are an excellent way to evaluate market timing systems.  That shows the investor how systems performed under a variety of market conditions.  We must prefer systems having good performance in most bad years as well as most good years.

Compound Annualized Returns (CAR)

   CAR is the proper math formula for averaging gains each year because it simulates real life better, i.e. the effects of losing years.  For example, the NASDAQ 100 Index had a CAR of 14.5%, 1985-2004.  The Moneyflow OTC System tests at a 23.0% average annualized return, long trades only.

 Moneyflow

  Trend + Momentum = Moneyflow

  Our Moneyflow market timing systems should not be confused with "money flow" systems that use volume data.  By measuring the trend and momentum of PRICE, alone, Moneyflow market timing systems eliminate the volume variable that erodes performance in the money flow indicators. 

  The proof is in the performance.  All market timing systems sound good in theory.  Insist on performance details for 40 YEARS. 

Moneyflow OTC System Details

Moneyflow NDX System Details

No author, publisher or system creator can guarantee future profits based upon past performance.  No guarantees, personal investment advice, recommendations or referrals are implied by the content of Moneyflow .com publications, systems or websites.  All rights to the use of this content are reserved.   Please read the Disclaimer and study performance records before using our services at your own risk. HOME of Moneyflow Market Timing Systems for Mutual Fund Investing  Richard Calkins, rc at moneyflow com, educator and trend analyst publishing system signals since 1995.