Trading managed funds

Based on the discussion that evolved from this thread, I thought I would start a new discussion about "trading" managed funds.

By this, I mean not just buy-and-hold long term ... but rather buying into and out of funds as the market dictates.

Does anyone currently do this ? If so - how do you determine when to sell (and when to buy) ?

Has anyone developed a system that they are actively using for trading funds ?

Discussion about the pros-and-cons of trading rather than buy-and-hold are welcome too.

PS. I have my own thoughts and theories - but I wanted some open discussion.

 

I originally thought the same - and was very much against the idea - especially (as Nigel mentioned) since you have fairly limited control as to the actual price you buy and sell at, given instructions are not acted on immediately but in several days time - by which time the price may have changed significantly.

It's not as if you can set stop-losses to sell out after a recent peak and then buy back once prices start to rise again - you simply don't have that much control over your funds.

However, since I've been thinking about it more lately, there's another factor which has been mentioned to me a number of times - and especially given the performance of some previously well performing funds over the last 6 months, I thought it worth discussing further.

That factor is ... making sure your money is always working for you.

When a fund has an extended down period, or an extended period of trending sideways, your money isn't doing terribly much. For example, by my calculations (and assuming reinvested distributions), anyone who bought into the NavraInvest AUS funds in early-mid may (or again in early July), has only just started to see their investment move into positive territory in the last few days.

In the meantime, other funds (eg CFS Property Securities) have gone up 18% since July !!!! So the choice is to either hold on and wait for things to improve, or else to move some (or all) of your money into a better performing fund to maximise returns.

Naturally there is a risk in doing so - there is no guarantee that a fund that has been recently performing well will continue to do so - but then again, having your money make no return where it is, is also a risk to be considered.

However, I see two different "phases" of investment that could require quite different approaches to managing your investment.

The first is accumulation phase - when you are actively investing new money into your portfolio (whether through external capital, or through gearing up via margin).

The second is when you have stopped adding additional funds (because you either don't have additional capital available, or because you have reached a self-imposed limit and want to minimise additional capital investment into this asset class).

I'm thinking a DCT-like strategy could work well when you aren't actively growing your portfolio with new capital - take some profits (not too much) when prices go up, and buy additional units when prices go down. The idea is to profit from the "swing" in prices from low to high above and beyond the performance of your underlying units. I wouldn't advocate selling a significant portion of your holdings at any one time using this method - I think using a relatively small percentage of your holdings for DCT trading could work well.

But I'm not convinced that strategy is best when actively growing the portfolio across multiple funds using new capital and gearing up.

That's why I'm starting to investigate what I call "momentum" buying ... allocating money to funds that currently show good positive momentum with the goal of riding the wave up - and accessing the additional equity that creates to gear up further. The main part of the strategy I haven't worked out yet is: when (and indeed "if") to sell. That requires some more thought.

All of this is, of course, just thinking out loud - with the goal of stimulating some discussion. I am by no means advocating any of this as a sound investing strategy without a lot more thought and planning as to how to manage the process.

Thoughts ?

 

Quite right Leandro ... but I'm not addressing these questions to "most of the NavraInvest unitholders"

Indeed according to this poll, currently more than 50% of respondents have money in funds other than Navra (or indeed no managed funds at all).

 

I still do fundamentally have a buy-and-hold strategy ... but when I had developed my analysis spreadsheet to the point where I was able to start charting the performance of the funds I was interested in - the visual representation really opened my eyes as to what was really happening.

I've since replaced most of that spreadsheet with a computer program I've developed to do the same thing - but with much greater control. The spreadsheet had become horribly complicated and didn't allow easy analysis of potential new funds. My new program also updates the data automatically from the web.

As I've mentioned in other threads, I'm currently adding to my portfolio on an almost weekly basis - both through external capital (from consolidation of other investments plus refinancing of my real estate portfolio) and through "gearing up" as my portfolio increases in value.

So my strategy hasn't really been "buy-and-hold" ... it's been "buy-buy-buy-hold-buy-buy-buy-hold"

Originally I was simply putting money into the fund that was furtherest away from the target value I'd assigned to each fund. That's fine for funds that are under-capitalised ... but some of the funds were low because the performance had been negative. Sure, buying additional units lowered my average buy price, but it didn't really help my overall performance if they didn't then start heading up again soon afterwards.

I realised that this strategy wasn't getting me closer to my goals very quickly - although over the long term, I'm sure they would do well - I was being held back by poorly performing funds.

When I started analysing the charts, it was pretty obvious that some indicators showed a positive momentum that more often than not indicated a steady increase in value. If I was to direct my additional investments towards those funds, then I figured I could ride them up and use that momentum to boost my returns.

The flip side of that is that some funds were obviously struggling at times - again as shown by the indicators on the charts ... and so depending on the nature of that "struggle" - I figured I would either hold (ie not increase my investment), or if really bad, sell down part (but not all) of my holdings in that fund and reallocate the capital elsewhere. Once that fund starts to show positive momentum again, I'd start buying in to catch that wave.

Once I reach my target allocation for each of the funds, it will change to more of a "hold-and-buy-more-when-cheap-and-take-profits-when-expensive" strategy ... which is still fundamentally a buy-and-hold strategy ... but aiming to add a bit more value along the way. This will also allow me to reduce my risk by paying down debt and aiming for a lower LVR.

 

Yes, yes, and umm ... yes.

Guilty on all charges

I needed a break from building InvestEd v3.0 ... it was starting to get me down. A lot of hard work still required there.

 

By the way - in case anyone is curious - my current indicators would have seen me stop adding additional investments to Navra AUS at the end of April, and then holding all the way through the last 5 and a half months and then starting to make additional investments as of yesterday (got the first buy signal since April from Wednesday's unit price).

I did get a "query" signal in early August - which means I would have had a close look at the chart and the underlying market to see if I thought it was worth reducing my exposure to that fund. This is not the same as a "sell" signal - the fund didn't drop anywhere near enough to even consider that. The query signal only lasted 2 days, so by the time I got around to analysing it - I would have been back into "hold" territory, so would have been unlikely to have acted.

I'm still refining these indicators of course.

 

It is web based, and does charting, but isn't ready for public consumption yet.

 

I agree that trying to trade a fund like you would shares is not going to work very well.

I'll leave that to the fund managers and share traders .

My "trades" (don't like calling them that) are once per week maximum for buys, while sells would be much less frequent - I'd be surprised to sell more than once in a couple of months ... and then only if there was a fund that met all the sell criteria.

I'm also talking about relatively volatile funds with pretty large swings in value and pretty high value transactions ... all of which make the buy-sell spread rather insignificant.

 

I prefer managed funds because of the geographic and sector diversity that is on offer - you simply don't get as much choice through LICs.

I'm not choosing funds to trade - I'm looking maximise the returns I have from the funds I've already chosen to hold long term.

Yup, I'm only dealing with wholesale funds which generally don't have entry fees - but there's no excuse for paying entry fees anyway - plenty of options out there for avoiding those fees.