Managed Account Programs: Do you ever trade gold funds or funds that go short the market? If not, why not? These have been obviously great places to be in the past year or two. I have looked into trading these instruments, and at one point, I did do a small amount of trading with an inverse Nasdaq 100 fund. I had picked the wrong time to do that, and I do not trade gold or precious metals funds.
One thing I have discovered about being a successful investor or trader is that it is critical to limit the scope of what one does. Investors who are just getting started should try a variety of approaches in order to determine what they can and can’t do and, quite importantly, what they do well. The things that are done well should be the focus of future investment activities. There is nothing that is right for everyone, and just because someone makes a lot of money using a particular approach does not mean that it will work for you.
I have discovered that my strength is developing and trading mechanical systems. Such systems require feeding data into formulas that determine what actions to take. Rarely (I would like to say never, but that is not realistic), should I have to make a judgment call about what to do or when to override what the system says. If I find myself doing that at all frequently, it means that there is something wrong with the system or my ability to use it.
I develop the systems by starting with a sensible concept, which often is not original, and testing my mechanical implementation of it on a large amount of historical data. Usually, the results are not promising enough to continue the investigation. If the initial testing looks good, then I will perform additional tests and analyses to see if I think the system might be a good one for me to trade.
I have found that my methods work best with sector funds and funds linked to some market indices such as the Nasdaq 100 and Russell 2000. They are also applicable, but in a different way and with a considerably different investment philosophy, to extremely strong companies such as those whose stocks are in the Dow Jones Industrial Average.
In making my evaluations, more historical data is usually better. My mutual fund testing usually begins around 1987. Gold funds have always been among the most volatile, and until fairly recently, they have been very poor performers. For these reasons, I have not been able to develop a good system for trading these funds. That does not mean that such systems do not exist, just that the type I develop are not going to work with gold funds. That also does not mean that one should not own gold funds. I do, but do not to trade them frequently. I have a target percentage of my overall portfolio that I want to have in gold stock funds, and every so often, typically about once a year, I will buy or sell such funds to bring the allocation back into the target range.
Inverse funds, which are funds that effectively short an index, possibly with leverage, are a bit different story. From time-to-time, I revisit the issue. The systems I have developed for trading these funds, even the unleveraged ones, sometimes hypothetically produce very large profits, but also with considerable risk levels. As market volatility remains at high levels and increases, the timing must be quite precise. Being off by a day or two fairly often may well substantially reduce profits or increase drawdowns. In short, trading the inverse funds, which would likely have worked out fairly well recently, is too volatile for my tastes. Again, that does not mean it can’t be done with a reasonable amount of risk, just that I haven’t found a good method to do that.
That brings us back to Select Advisors, which I discussed above under Developments. There are money managers on that platform who have very good results trading gold funds and inverse funds. (I would prefer track records that extend back before 2000, but Select Advisors did not exist earlier.) For those who are interested in my placing some of their investments in gold, short, and/or other types of investment approaches that I do not offer, Select Advisors may be a good solution.