Having just one strategy of buy -sell rules for safe profitable investing doesn’t work. The concept sounds great and many authors give precise advice on how to set your buy – sell rules, but safe investing requires more than putting all your eggs in one basket.
The reasons having one set strategy doesn’t work are many fold. The keys are:
- The groups or universes of ticker symbols
- Different means of analysis
Different groups react differently to analysis. Stocks, for example, have different movement characteristics from mutual funds and ETFs. Because mutual funds and ETFs are composites of stocks their momentum or even moving average is generally different from any one particular stock. Mutual funds also are different from ETFs because they are a managed group of tickers that can and do change in contrast to ETFs which are more set in their composition.
Furthermore, once you have a strategy of signals developed for a particular universe, changing that universe (group) changes the dynamics of the group because that new ticker most likely has a different momentum or moving average that the group as a whole. This means any change to a group requires new back testing or optimization to find the best potential returns based on your goals for safe profitable investing.
Different means of analysis comes into consideration and rules out have one set strategy because of two primary factors:
1. Different types of analysis may work best for different types of groups. ETFs usually give the best results when analyzed with the basic relative strength momentum formula while funds provide the best results when analyzed with the alpha formula.
2. Each type of analysis has variables. Some groups may provide the best return when analyzed over a short rolling time period while others over a longer rolling period.
The purpose for your strategies may depend upon the type of group and your objectives for that group.
Most mutual fund investments are for mid to long term periods of a few months to years while stocks may be used for just weeks, months or years and the same is true for ETFs.
Developing a successful long term strategy requires careful back testing based on your objectives and basic parameters. For example you may never want to hold a position if it drops more than 9% from a high, so in setting your test you would set 9% as the maximum stop you would allow.
Once you establish your guidelines for back testing you can run a back testing optimization with your investment software. You can prove to yourself how changing just one element of a strategy can affect the result by changing just one setting. With anywhere from three to eight parameters in a strategy you can see how making one change can have dramatic effects.
Another self-test would be to take a strategy you like and add or subtract a ticker from the group to see how the results are affected.
Developing strategies that meet your goals for each group or universe of symbols is the homework part of investing safely for the long term. Once you have your strategies they rarely require change and future optimization need only be done every few years. Even this is not that difficult with investment software – you just set your variables to be tested, let your computer and the investment software do the work while you enjoy dinner or a round of golf.