A Disciplined Plan for Investing
The ETF Discipline is my name for an investing method
similar to what traders call a “system.” The goal is to hold
the best-performing lowest-volatility exchange-traded
funds (ETF’s) in bull markets and to protect the portfolio
from large losses in bear markets. Disciplined investing
consists of four elements: a timeframe, trading vehicles, a
set of rules, and emotionless execution.
What We Buy, and When We Buy It
In today's choppy markets, our timeframe we look for
trends that typically last weeks to months, making our
decisions on 6-month or 1-year daily charts. We choose
funds as opposed to stocks, because, not being affected by
individual company news, they offer most of the
performance and less volatility than individual stocks. After
2006, we abandoned mutual funds for ETF’s because of high
fees and costs, and inability to buy or sell them during the
trading day.
Trading Rules
The ETF-Letter scans for top-performing not-too-volatile
ETF’s and monitors about 80 that cover most market
sectors. We buy when we find qualified uptrends, and hold
while the trend lasts or breaks sideways. When the trend
points downward, we sell. We may also choose to hold
certain funds in downtrends and preserve their value by
buying put options.
How do we know when a fund is in a trend and the trend
changes? Our method uses support and resistance levels to
identify when transitions take place and determine where to
set buy and sell stops. The details are explained in my book,
The X-Discipline: Financial Independence for the Web-
Savvy Investor. (“X-Discipline” morphed into ETF
Discipline).
The Secret Sauce: Sentiment, Emotions and
Execution
Just kidding. There is no secret sauce; however, investors
often mistake the mechanics of charts and trends as the only
keys to success. Successful traders and investors have
learned that investing is personal, and understanding
market sentiment gives you an edge because it determines
how markets react to news events. We assess sentiment
each week in the ETF Letter.
The disciplined process works to reduce the emotions that
come from putting your life savings at risk. Emotions drive
you off your plan, leading you to buy and sell at the worst
times. Our plan controls emotions by establishing known
entry and exit prices for our positions, and limiting the risk
of every position we take. You learn to invest in ways that
let you sleep at night.
|
|
A relative strength chart allows you to compare different funds
that are leaders during a rally to quickly determine by eye
which have the best performance/volatility tradeoff.
|
|
|
We use trends, support, and resistance to identify when to sell. The fund
above gave ample signals well before its crash.
|
|
|
Funds can out equal the performance of an individual stock, as shown
in this relative strength chart of an airline industry mutual fund and a
single airline.
|
|
|
|
|
|
| |
|
