If a fund is in one of the two top ranks but does not meet the purchase rules, put that fund's portion of the portfolio in a money market fund. Do not move further down the rankings in search of a fund that meets the purchase rules. Once a fund is in the portfolio, sell when any of the sell signals is triggered. The sell signals also are simple. When the latest issue arrives, scan the rankings. If the fund dropped out of the top 15 funds for that portfolio that are listed in the newsletter, sell. Replace it with a top-ranked fund that meets the purchase rules or put the proceeds in money market funds. A fund also should be sold if its return for the most recent four weeks is negative. (A conservative investor might set a rule to sell if the one-week return is negative.) Between issues, a fund should be sold if its daily net asset value falls below one of the sell signals listed above (for example, 5% below the recent high for diversified funds). If a fund is sold between issues, put the proceeds in a money market fund and wait for the next issue to see how the money should be reinvested. Handling distributions is important at times. A distribution reduces a fund's net asset value or price without changing shareholder value. A distribution that is made after the fund is purchased should be added to the net asset value (or subtracted from the previous high price) to determine if a sell signal is triggered. Trades generally are made in the IWW system every couple of months. Sometimes trades are less frequent; sometimes they are more frequent. Because gains are likely to be short-term, it is best to implement the system through an IRA or other tax-advantaged account. Otherwise gains would be taxed at ordinary income tax rates. A potential advantage of investing in IWW through a taxable account is that trading losses would offset the gains, while losses would not be deductible if incurred in an IRA. I offer four IWW portfolios. The Classic Mutual Funds portfolio is the original and has the longest track record. This portfolio is derived from a database of over 300 no-load and low-load mutual funds representing almost every available asset class and investment style. The portfolio has become difficult to implement in recent years and might be phased out. Many mutual funds discourage systems such as this by imposing redemption fees on investors who do not hold their funds for a minimum time, usually six months or more. If such funds are purchased through a discount broker, the broker often will impose the redemption fee. The Classic Mutual Funds portfolio is best followed using an account at a mutual fund discount broker. This allows trades to be made with one phone call or through one website. Otherwise, it could take a while to execute trades, and additional costs might be incurred to transfer money from one fund to another. There also are separate portfolios for the ProFunds and Rydex fund families. These fund groups encourage frequent transactions and trading systems with their mutual funds. These fund groups also offer leveraged funds that can magnify returns. A further potential benefit of these fund groups is their funds that sell short different market indexes and asset classes. These allow investors to profit when investments are declining. The fourth portfolio is composed of Exchanged-Traded Funds (ETFs). The database for this portfolio does not include all ETFs. Many are too new to have adequate track records or are too lightly traded. Light trading means that a few large trades can exaggerate price movements in the shares and put them at great variance from the underlying assets. Also, a number of ETFs cover small market segments, and their returns are dictated by movements in only a few stocks. We want broader-based ETFs than those. I consider IWW to be an aggressive investment approach. It is appropriate only for someone who is able and willing to spend a few minutes each day checking the prices of funds in the portfolio to see if a sell signal was triggered. It also is suitable only for investors who don't mind volatile investments and making trades every month or two. In addition, not all trades in the system are winners. The investor must be able to tolerate periodic losses and losing streaks in the portfolio. Even for appropriate investors, I recommend only 5% to 10% of the total portfolio be in aggressive investments such as this. IWW is a momentum-based investment system. It invests in funds that have established themselves as recent market leaders and sells them soon after their prices decline below their peaks. When the system is working, a fund will stay in the portfolio long enough to generate a meaningful gain before triggering a sell signal. The market environment over the last year has not been good for this system, and none of the portfolios has positive returns. The major stock market indexes have been mired in fairly narrow trading ranges. Stock funds (and those that sell short stocks) reach the top of the rankings about the time that they reach the limits of the trading range and are getting ready to decline. Other investments, such as commodities and emerging market funds, incurred sharp corrections soon after reaching the top of the rankings. As a result, the portfolios have not had periods when they were buying market leaders and riding them for additional gains. Short-term trading, based on short-term performance and momentum, is what has worked in this market. The IWW system depends on more normal market environments when intermediate trends are established and last for a while. Of the four IWW portfolios, the best in the last few years and I expect the most promising going forward is the ETF portfolio. ETFs now offer almost as much variety as traditional mutual funds. They also do not have redemption fees. In addition, trades can be made at any time during the day. In my model portfolios I use the closing price each day to decide if a sell signal is triggered, but you don't have to. To be cautious, you can sell if a signal is hit any time during the day. The ETF portfolio offers more variety than the ProFunds and Rydex portfolios. For example, ETFs have more international funds and more alternative assets such as commodities. In addition, many of the short sale or inverse funds from ProFunds, Rydex, and other fund groups are available as ETFs. ETFs do incur a trading fee for each transaction. But you can shop for the broker that charges the lowest fee for the level of other services, such as web-based trading, that you want. Classic Mutual Funds would incur a fee for all or most transactions through a discount broker, and those fees are likely to be higher than fees for buying and selling ETFs. In the latest rankings, short-selling or inverse funds are at the top of most of the rankings. In the recent past, these funds reached the top of the rankings just as markets were reaching the bottom of the trading range. It could be that we actually will earn profits from the funds this time, or the markets will reverse long enough to trigger sell signals and shake up the rankings again. The IWW portfolios will continue having a tough time until the market volatility and uncertainty declines. When the economy and markets return to more normal patterns and establish intermediate term trends, the portfolios will return to their historic profitability. October 2008.
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