The following methodology has been developed to enhance the Tactical Timing System (TTS). It is felt that by following these guidelines some of the risk associated with stock market investing can be mitigated. However, in a 1929-1931 style market collapse, the TTS will not protect investors from a loss of investing capital. If you choose to follow the methodology, please keep this in mind and only invest money you can afford to lose.
Methodology
Signals
When a buy or sell signal is given the allocation of stocks and cash will be adjusted to approximate the recommended target allocation level. Stocks and/or mutual funds will be recommended for purchase or sale when the signal is given. It is not necessary to follow the recommendation of securities. However, an effort should be made to buy securities with strong financials and a proven ability to weather market "storms."
Purchases
When a stock is purchased, generally 5 percent of the portfolio's equity will be committed to it. When purchasing a mutual fund, 10 to 20 percent of the portfolio's equity will be placed in it.
Sales
When a sell signal is given, consideration will be given to potential capital gains, and relative price momentum of holdings. The following heirarchy will be generally adhered to:
Aggressive Portfolio:
Sell securities with capital losses
Sell Securites with weak relative price strength relative to the other holdings in the portfolio since the last buy signal
Consideration will be given to short sales and put options if substantial tax liabilities will be generated by the sale of securities in the portfolio.
Conservative Portfolio (IRA/tax deferred type of portfolio):
Sell Securites with weak relative price strength relative to the other holdings in the portfolio since the last buy signal
Re-Balancing
If the allocation moves 5 percentage points out of balance either way, the portfolio will be rebalanced by buying or selling securities to reach the recommended allocation. The on-line and E-mail newsletter will signal when this has occurred.
When a stock gains in value and becomes more than 10 percent of the equity, 30 to 50 percent of the position will be sold. Likewise, when a mutual fund becomes more than 30 percent of the portfolio, 30 to 50 percent of it will be sold. The proceeds will be used to purchase another security.
Philosophy
The use of an investment system has significant advantages over a more "laissez-faire" investment approach. The main advantage is that it eliminates emotion from the equation, which has sabotaged many an investor. The fear and greed phenomenon causes investors, both professional and novice, to make trades at very inappropriate times. Buying high and selling low is the modus operandi for a large number of stock market participants. A good investment system, when adhered to concretely, will more likely enable a person to buy when valuations are reasonable and sell when they are not so reasonable. Another advantage is that a system can be designed so that trades are only accomplished at opportune times which will probably be less frequent than with emotional buying and selling (it's been true in my case, anyway). Before utilizing the system, I spent thousands of dollars on commissions in a fruitless attempt to generate returns based mainly on intuition. With this disciplined approach, my contribution to the brokerage industry via commissions has dropped drastically, while my returns have improved substantially
There are some widely followed analysts betting against the future prosperity of our nation and the world. They have been incredibly wrong. It is folly to bet against the pervasive uptrend of human creativity and inventiveness. The U.S. market has risen an average of 11 percent a year over the last century, and has gone up approximately every two out of three days of trading. This is an incredible bias to the upside based on the progression of mankind. This progress is likely to be but temporarily interrupted. An investor "really" has to know something, or be incredibly lucky to bet on a down market and get it right in some manner approaching consistency. Those who claim they know, usually don't, and few are lucky enough to time markets so well as to successfully recommend a 100 percent stock or cash position at any moment in time. Therefore, investors should base most of their decisions on buying stocks rather than selling. Equities should be accumulated consistently during a persons working and saving life. For those who like simplicity and prefer a minimum of record-keeping it is hard to beat dollar cost averaging in a low cost indexed stock fund. Sticking to this strategy unerringly will keep emotions, the enemy of investors, at bay. I truly believe the best route for most investors is a mix of index stock funds (domestic and foreign), indexed bond funds, and cash. Younger investors should maintain a heavier allocation targeted towards stocks. Unfortunately, indexing ones investments is neither fun nor exciting, but a logical choice nonetheless.
I can think of no other occupation where so little comes from a lot of effort as those who manage money. When upwards of 80% of stock mutual funds can't beat the indexes it is troubling to ponder all of the wasted human resources devoted to managing these funds. However, without all of the effort placed in wrongly trying to outsmart the market, securities would be priced less efficiently. There is no such thing as a perfectly priced security in any stock market in the world, but if everyone relied on index funds, disparities between stock market valuations and true worth would be much more distorted than they are now.
