NoLoad FundX Event Questions & Answers

October 7, 2011

At the NoLoad FundX event last month, we got some great questions from investors and we thought it would be useful to share some of these questions and our abbreviated answers.

Investor Question:
It’s very clear to me what funds to buy each month, but sometimes when I go to sell a fund, the market is down. Should I still sell the fund or should I wait until market conditions improve?

Our Answer:
We’ve found that keeping the system as simple as possible is valuable because it helps people stick with the discipline. That’s why we believe that yes, you should sell a fund regardless of whether the market is up or down. Whatever has happened that day in the market has already happened and over time, we haven’t found that holding off trades until market conditions improve makes a difference in performance.

Investor Question:
Have you ever looked at mixing stock funds and bond funds and using your ranking system to determine which to invest in?

Our Answer:
This is something we have looked at many, many times over the years — and the short answer is that it doesn’t work very well.

The system doesn’t prompt us to get into bonds until the stock market is down 20-25% — often the market turns up by this time, and we end up whipsawed and miss out on much of the subsequent run-up.  This means we still suffer through much of the downside of stocks and then have exposure to the upside of bonds –just when we want the want the upside of stocks.

This approach does seem to work in very severe bear markets, however. In 2008, for example, it looked great because the market kept going down past the 20-25% that would have moved us into bonds. But in most market environments, using our ranks to as a timing signal for when to invest in stocks and when to invest in bonds simply doesn’t work.

Investor Question:
How do you decide what funds to include in the newsletter and what funds to include in the mutual funds you manage?

Our Answer:
We monitor a much larger group of funds than we have in NoLoad FundX but we filter through these funds to focus on only those that we are comfortable buying and those we are comfortable with in our strategy.

Because Upgrading is a relative ranking strategy, one fund affects the rank of all the other funds. Even a fund that never becomes highly ranked may prevent another fund from rising into the buys or prevent a fund from dropping into the sells. We are careful about our fund classifications and spend a lot of time looking at how funds function within a class. This can be said for the “load-waived” or institutional funds we use in our managed accounts, as well as the funds listed in the newsletter.

Investor Question:
Don’t taxes eat up any gains you make?

Our Answer:
Although we have a very active strategy, with average turnover around 100-150%, we have historically managed to distribute about 85% long term gains. This is because with our strategy, we hold on to the funds that are doing well and we sell the funds that aren’t doing as well. Over time, we find that the funds that contribute the most to our gains are those that we’ve held long term (over one year). The funds that we hold short term tend to have made smaller gains, or even losses that can then be used to offset taxable gains.

Going into 2008, for example, we had no embedded gains, and after 2008, we had enough realized losses to offset substantial future gains.

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