Diversification: I would be uncomfortable with all of my investment in just one Select fund. How many funds should I own? There is no "right" answer to this question. It is largely a matter of personal preference and risk tolerance. I have studied the effects of applying my methods to hold more than one Select fund at a time. Without overwhelming you with a blizzard of data, the results can described by saying the highest returns and greatest risk (as measured by volatility and "drawdown," which is the percent loss from any peak asset value before the peak is exceeded later) are associated with placing the entire investment in a single fund and following the Switching Program. Increasing the number of funds held results in slightly lower returns and a bit lower risk. (Please contact me if you want details). One problem is what to do when the system calls for combining two or more investment pools into the same fund. Possibilities include moving to the money market fund temporarily until a different fund is top ranked or buying the second ranked fund. Both policies have similar effects. However, it is difficult to maintain investments in more than three funds without using the money market fund quite a bit, which tends to substantially decrease the overall investment return and the risk level. My feeling is that an investment in the Select funds is by its nature an aggressive one, and with this in mind, the best policy is to be not in the money market fund unless the system calls for it. For most people, this means holding two or three Select funds at a time. Those wishing to be more aggressive can have their whole investment in just one fund. If you want me to allow this to happen, let me know. Otherwise, I generally assume that clients want some degree of diversification, so I try to keep their investment in at least two different sectors.
Market Timing(1): Since the Select Switching Program can move into the money fund, aren't you really trying to time the market? You might say that, but I really don't think so. The traditional market timer attempts to identify periods when the market is more likely to go down than up, and then exits the market during such periods. Depending on the methods used, there may be several ins and outs a year lasting a few weeks or a month or two, or the holding period may be measured in years. The Select Switching Program will only move into the money market fund when it is the top ranked, which means all the other Select funds (excluding American Gold and Precious Metals which are not in the Program) have gone down over the test period and if it is time to sell the fund currently held. This happens infrequently and should not be construed as a market forecast. What the system is saying in this case is that based on recent performance, the money market fund is more attractive than any of the sector funds. Any hypothetical single fund Switching Program started in the first half of 1987 would have been in the money fund during the October crash, which certainly gives the appearance of market timing. Starts later in the year may have been in a sector fund during the crash. Successful traditional market timing would have called for being entirely in cash. More recently, some of my personal accounts have been in the money market fund for five week periods starting in April and December 1994. In each case, the market went essentially sideways.
Market Timing(2): Wouldn't your system be improved by getting out of the market when a good timing system said to do so? I have looked into the this question, and I think the answer is no. One problem is finding an appropriate timing system. If the signals are too frequent, then Fidelity's 0.75% penalty for selling a Select fund within 30 days may come into play. I am not a student of timing systems, so I rely on reviews and word of mouth to determine which timing systems are worthwhile. One that is well regarded is MIRAT, and a long history of its signals is available. When I tried applying MIRAT signals, which typically last from several months to a year or more, to the hypothetical Select Switching backtest, the results got worse. The backtesting results show that the Select Switching Program can be profitable even during weak markets. Not all trades show a profit, but enough do to justify staying in the market.
Getting Through to Fidelity: How can you be sure you will be able to get through to Fidelity? What if we have another meltdown like October 19, 1987 ("Black Monday")? My normal method for entering client transactions is to use Fidelity's automated telephone system, which involves punching buttons on a telephone. An alternative is to call an 800 number and talk to a person. So far I have never had any trouble with either method. The automated system has always answered immediately, and the longest I have had to wait for a person is about two minutes. However, this may not be the case if we do have another crash like 1987 in spite of the "circuit breakers" that have been instituted since then. This won't make anyone feel better, but it probably would not have made any difference if you had gotten through to Fidelity on October 19, 1987. If you listen carefully, Fidelity (and all other mutual fund companies) says that transactions will be executed at the next "available" price. For most mutual funds, this means the closing, and only, price of the day. The Select funds, however, are priced hourly starting at 10:00 AM, so most of the time this means the next hourly price. On Black Monday, about 2/3 of the Select funds did NOT have closing prices (and I assume no hourly prices either). I think that Fidelity could not get the prices of all of the underlying securities due to the chaotic market conditions. By not posting a price, Fidelity did not have to execute transactions without knowing the funds' true values. Any order given to Fidelity on October 19 most likely would not have been executed until some time on the 20th. In my backtesting, I pretended that the market was closed on October 19, 1987 and used the data for the 20th as my "Monday" that week.