Mutual Funds Stink

Let’s face it. You’re not going to enjoy your world if you’re broke. I’m not an investment counselor or a broker, but I do know that paying attention to Vector Vest certainly saved my rear end in the latest stock market debacle. For years I have been getting the classic “buy and hold” advice from my brokers at big time, name brand brokerage firms… and, as those of you who actually did hold on to your stocks after June 11, 2008 know, if I had listened to this advice I would have seen a huge loss that basically wiped out the gains of the last few years. In my book, that really stinks.

I Found A Better Way to Invest Money

In early 2007, I found out about a company called Vector Vest about the same time I started listening to Courtney Smith about investing and opened an account at Scottrade. Courtney told me that the buy and hold strategy does produce better results than sticking your money in a savings account, but is really not a very smart way to invest your hard earned cash. He said that it’s really a better idea to buy and sell individual stocks… but the buy and sell strategy doesn’t really work with the big brokerage firms because they charge too darn much for individual trades. It’s ridiculous… hence, the account at Scottrade. There is nothing really magical about Scottrade. Just get an account somewhere that costs less  than $10 a trade. Scottrade is $7.

I’m not the kind of person that likes to sit in front of a computer screen all day and watch stock prices, so I had to find a strategy that would allow me to just check stocks once a day for a few minutes… and, frankly, my opinion is that if you’re not willing to do that you aren’t really serious about wanting to improve your investment strategy [yes, there are some other alternatives I will discuss in future posts].

A Really Simple Investment Strategy

It works for me!

I found a really simple strategy – and that’s important – when I ran across Vector Vest. Take a look at the following 3 year chart.

This chart is the Vector Vest composite index, which is made up of over 8,000 stocks. I think is really a better indicator of what the entire market is doing than the Dow or NASDAQ. Take a look at the big blue dotted line. This is what happened to people who followed the buy and hold strategy. They lost money over 3 years… so, literally, it would have been better to stuff your money in a mattress.

Now take a look at the vertical red and green lines. Those are the Vector Vest confirmed market downs and ups. The confirmed ups in green are the buy… buy… buy times [thank you Jim Cramer] and the confirmed downs in red are the sell… sell… sell times [boorah!]. The solid red arrows on the chart represent the times that you would make money following this simple strategy. You might notice that there is only slightly improved performance by following this strategy over the buy and hold technique between October 31, 2003 and October 12, 2007… but then the market starts to fall. Following the simple Vector Vest strategy avoids the subsequent crash. In fact, you make a little money between April 11, 2008 and June 11, 2008 before completely avoiding the really big drop beginning in mid June. Not bad eh?

Improving The Strategy with Counter ETFs

Now let me tell you about a slight addition to this simple strategy based on what are called Counter ETFs. These are funds that are designed to increase in value while the market is falling… but you don’t have to know a thing about selling short. You just buy them like you would any other stock. It’s simple. Now take a look at the solid blue arrows on the chart. Those are times when the market is falling… but the Counter ETFs are increasing in value. I hope you’re getting the picture here. You can make money both when the market is rising and when the market is falling if you sell Counter ETFs and buy stocks when you see a confirmed up and sell stocks and buy Counter ETFs when you see a confirmed down. So, in the chart, you make money whenever you see any solid arrow. Pretty nice! All you need to do is add protective stops when you buy.

Of course Vector Vest also gives you tools to pick which stock and which Counter ETF to buy. More on that and protective stop strategies later. By the way, today, October 30, 2008 is the wrong time to jump into the market. For this strategy to work, you’ve got to time it with the confirmed ups and downs.