How I Invest

If you’re reading this, you are about to get into a level of detail that I believe is at the heart of what makes my investment process distinctively different from other investment advisors.  Thank you for taking the time.


After establishing the client’s financial objectives, resources, and risk tolerance, I establish an investable combination of equity and bond ETFs to form the basis of the benchmark that will be used to measure my performance over time.  Having back-tested sample benchmarks against asset allocations produced by several of the popular robo-brokers, I have found that my benchmark approach provides similar or better annualized returns (depending on the time frame) with lower risk and higher risk-adjusted returns – thus producing a challenging target for my investment performance.  This is one of several distinctive differences in my approach compared to most other investment advisors.


Once the benchmark has been set, I develop an initial asset allocation based on current macroeconomic and market conditions and put in place the process by which the account will be managed over time.  With further explanation to follow, my investment process can be characterized as a hybrid of technical and fundamental analysis by:


  • Following trend and momentum using moving averages over different time frames and

  • Using sustaining relative performance of securities relative to the benchmark funds,

  • All taken in the context of developing macroeconomic conditions and corporate revenues and profits.


The great majority of my investments are in actively traded exchange-traded funds (ETFs).  ETFs have many advantages over most open-end mutual funds, including tax efficiency, low cost, and, where appropriate, greater sector focus.

Occasionally I will also invest in open-end, no load mutual funds and individual preferred stocks, especially when they have superior relative performance to comparable ETFs.  I avoid individual common stocks and, in the context of the emerging higher interest rate environment, I also avoid closed-end funds which are frequently leveraged.


I rarely hold more than 10 separate securities in a client’s portfolio.  Using back-tested optimization, I find that to hold more does not particularly add value from a diversification standpoint and keeping the number low allows me to be more effective in selecting funds with sustainable-looking relative out-performance and periodic rebalancing.


To keep informed of macroeconomic events and business conditions, I read dozens of online resources weekly, some free and some by subscription, including publications and interviews of prominent investment firms, investment analysts, and economists, in addition to a wide variety of business and economic publications.  By gaining a broad range of opinions, I am able to formulate and act upon my own economic outlook without the constraints that might be imposed if I were a representative of a larger organization.


I believe in using technical analysis because the method strips away the often conflicting points of view of even the most highly regarded investment analysts and firms.  In addition, I find:


  • Security prices and the relative performance of security prices tend to remain in a discernible trend over a period of time depending on factors unique to the specific securities and the economic environment, and

  • Trends and, especially, reversals in trend, tend to be self-reinforcing on account of the number of trend following analysts using similar techniques.


While the approach is imperfect, as all investment strategies are, and past performance is no guarantee of the future results, I believe the results over time justify the effort involved.  Here are some illustrations of how the approach has worked in the past.


In the next chart, we see the weekly price of the Vanguard S&P 500 Index fund for the period from 1995 through 2016, adjusted for dividends to illustrate total return.  By following the 60-week moving average (for trend) and being sensitive to extreme readings in the MACD (for momentum shifts and confirmation of trend), owning the fund while the price was above the moving average and the slope of the moving average was positive and being out of the fund when the price was below the moving average and the slope was negative would have produced a higher total return than a buy-and-hold position. 


The closer a transaction is made to the top or bottom of the trend, the more valuable the methodology is relative to buy-and-hold.  Moreover, following the simple trend rule would have not only avoided the market corrections in 2001 and 2008, it would have provided valuable signals for market reentry.  The false signals, as it turned out, that occurred in 2010, 2011 and 2015 would have been a small price to pay for the overall performance of the method.

In the next chart, we see the relative performance (the ratio) of the total return of the Vanguard S&P 500 index fund to the total return for the Vanguard Total Bond Market index fund.  Generally, as in the chart above, when the ratio is above the red trend line (also a 60-week moving average in this case) and the trend has a positive slope, it was advantageous to have a portfolio weighting favoring equities and when the ratio was below the trend line and the trend line retained a negative slope, it was advantageous to have a portfolio weighting favoring bonds. 


Once again, there were times when a “whiplash” occurred when the ratio moved rapidly above and below the trend and the slope changed quickly.  Trading at these times would have resulted in a small price to pay for the overall total return of the method.

Each of these charts illustrate that the method is not designed to try to capture the top or the bottom of the market, something that is impossible to do with any consistency anyway.  Therefore, there will be times, maybe months in length, that we will be on the “wrong side” of the market (using daily rather than weekly trends can shorten the length of these periods but may have other drawbacks).  This underscores the need to stick to the methodology even when it seems to going against current markets.  This is good practice regardless of the investment strategy being implemented but can make some month-to-month returns unattractive.


Having said all this about my methodology, I find the greatest concern among investors is the potential for being caught in a major market meltdown.  Even though I believe in a positive long term outlook for the securities markets, when corrections do occur, it can take a number of years before value is restored.


Although the above charts provided good signals for avoiding recent corrections and may do so again, I employ additional techniques to help assure that my clients are not “caught” when the next one comes along:


The first is an independent “trigger” (independent of the actual investments within a client’s current portfolio and independent of market pundits and my own market views) based on 25- and 50-week exponential moving averages (EMAs, which are more sensitive to recent data than are simple moving averages) applied to an exchange-traded fund representing the total return on the S&P 500 (SPY).  When price breaks below both EMAs, as it did 7 times since 1992, I take that as an indication to begin removing risk exposure from the portfolio, the speed of which depends on economic and market valuations at the time.  If the slope of the 50EMA turns negative, that would increase the speed with which I would take risk off the table.  If the 25EMA crosses over the 50EMA from above (as it did at the red arrows below), that would be a signal to me to significantly reduce risk exposure.  As with any trading methodology, there can be misleading signals (the most recent correction in 2016 may be one example though it's a little too early to tell for sure).  That said, since we don’t know at the time of a signal how deep a correction might be, I’d rather pay the price of too much caution than too little.

In times of market stress, I will provide an update to this chart in the Market Commentary section of the website. 


Another risk control measure is an outgrowth of my limiting the number of separate investment securities in the portfolio.  By holding the total number of distinct investments to less than 10 in most portfolios and by using “block trading” with which I can reach all client portfolios simultaneously, I am able to implement risk reduction quickly and fairly across all clients.


Finally, I need to emphasize that no trading strategy is perfect all the time and past performance cannot be taken as a guarantee of future results.  My primary objective is to protect client assets from a major market correction, one possibly lasting months or longer as in 2000 and 2008.  After that, my aim is to produce results, after fees, that exceed my performance goals.  Although there have been periods when I have been less than successful, I believe the techniques I’ve developed over time and continue to review will stand me in good stead in the years to come.