TSP Fund Rotation Strategy

Why Taking Control Matters

Diversify and Rebalance?  Why Be Average?
The financial industry has hypnotized us into believing diversification and rebalancing is the only worthy investment strategy. But diversification inherently means owning a little bit of everything — which is the formula for achieving precisely average performance! Rebalancing further ensures  we won't stray far from average. No other industry proclaims average performance is the best you can achieve. Fortunately, it's not true here either.

Change the Game!
To achieve a different result requires a different approach. Price momentum has long been proven the best predictor of future returns. Simply by owning momentum leaders and avoiding momentum laggards one can simultaneously improve returns and reduce risk of loss. No diversification compromise! SectorSurfer further maximizes performance utilizing digital signal processing theory and automated strategy tuning.

An Extra 10% Really Matters
Before Retirement: The Nest Egg Value chart illustrates how an additional 10% annual return compounds over 15 years to produce a nest egg four times the value it would have otherwise had. The earlier you start, the greater the multiple. It really matters!

After Retirement: The Nest Egg Annual Income chart illustrates how portfolio return affects the inflation-adjusted annual income you can take, assuming a $100k nest egg, 2.5% inflation, and 30 years of retirement to fund. In the illustrated example, investing in the S&P 500 would likely allow an income of $14,000/yr. However, earning an extra 10% increases it to $36,000/year. Again, it really matters!

Additional Resources
• The Economist: Momentum in Financial Markets. A compilation of industry studies and expert opinions.

What is True Sector Rotation?

The Trend is Your Friend
Trends and fads are an inherent part of human character. It takes time for information to spread, to be understood, and to be acted on. This creates momentum. Price momentum is found in all capital markets, including stocks, bonds, treasuries, and currencies. By its very definition, "trend" means that information from the recent past tells you something about the near future. SectorSurfer algorithms use modern digital signal processing theory to optimally extract trend signals from noisy market data.

True Sector Rotation
The market cycle is tied to the economic cycle. Each market sector performs best during a portion of the economic cycle. If you think of each market sector as a piston in your investment engine, the smoothest, most powerful ride will be achieved when each of the major market sectors is represented in your portfolio ... but only while each is delivering its power stroke.

By owning only momentum leaders and avoiding momentum laggards one can simultaneously improve returns and reduce risk of loss.  That's True Sector Rotation! 

Diversify and Rebalance?
Diversification inherently yields precisely average performance. Master investor Warren Buffet instructs us: "Wide diversification is only required when investors do not understand what they are doing."

Additional Resources
• Short video demo on how True Sector Rotation produces higher returns.
• SectorSurfer Operational Theory Page provides summary and technical explanations.
• The Economist: Momentum in Financial Markets. A must read for momentum doubters.
• Jegadeesh & Titman Profitability of Momentum Strategies. Academic momentum paper.

Instructive Video

How StormGuard Reduces Risk

Risk is About Losing Money!
The definition of risk depends on who you ask. The financial industry uses the coefficient of variation (CV) to measure risk, which tells you how wiggly the line on the chart is, but not the probability of losing real money. Treating both up and down-moves equally as risk is an unfortunate consequence. Only down-moves contribute to real loss. SectorSurfer's risk measure is the probability of a 15% loss in a year.

StormGuard Measures Market Health
Not only do SectorSurfer's momentum algorithms inherently steer around and avoid poorly performing funds, but its StormGuard Indicator monitors overall market health and advises a move to the safety of a money market fund when market storms approach. The StormGuard Indicator is calculated daily from a basket of broad market indicators.

Optimized for Minimum Probability of Loss
The StormGuard Indicator optimally tunes itself for the minimum probability of loss according to the character of the constituent funds/stocks of each SectorSurfer Strategy by balancing the probability of whipsaw loss from reacting too quickly to market dips against the probability of loss from reacting too slowly to major downturns.

Diversify and Rebalance?
Warren Buffet instructs: "Risk can be greatly reduced by concentrating on only a few holdings." SectorSurfer practices serial diversification by owning many very different things, just one at a time.

Additional Resources
• Short video demo about how SectorSurfer makes lower risk possible.
• StormGuard Technical Details in the SectorSurfer Online User Manual.
• SectorSurfer Operational Theory Page provides summary and technical explanations.

Instructive Video

We Kept it Simple!

       After creating your new account:

Only Four Steps to Get Started
 1.  View the short My Strategies Tour video.
 2.  Click , pick a Strategy, or create your own.
 3.  Check charted performance by clicking .
 4.  Edit the name and add notes. You're done!

       After clicking your email alert:

Only Four Steps for Trade Alerts
 1.  See which ticker symbols to sell and buy.
 2.  Click the icon for specific trade information.
 3.  Click your brokerage link and go make the trade.
 4.  Click the button. You're done!

Additional Resources
• Short video demo showing how to select or custom build Strategies.
• SectorSurfer Online User Manual details all the features and functions.
• Subscription Plans range from Free to just a monthly pittance for Premium Strategies.
• Our  will help you quickly create an account to get you SectorSurfing.

Instructive Video

SectorSurfer's Algorithm Validation

Overview
SectorSurfer's validation is confirmed by the validation of each principle detailed in the paragraphs below.

Trend Signals Exist in Market Data
In his 1996 book Chaos and Order in the Capital Markets, Edgar Peters applied the Hurst Range/Scale analysis method to data from all capital markets, including stocks, bonds, commodities, and treasuries. He found that they all have a significant short-term trend component that dissipates after numerous months.
• See Hurst Exponent Reveals Trends on the Operational Theory Page for additional technical information.

Momentum Strategies Really Work
When you can get the media, industry, and academia to agree that something is real and works, then you know you really have something. These three momentum trading articles do just that:
• The Economist: Momentum in Financial Markets. A survey of strategy results and expert commentary.
• Columbine Capital Price Momentum - a Twenty Year Research Effort. Industry momentum white paper.
• Jegadeesh & Titman Profitability of Momentum Strategies. A fundamental academic momentum paper.

SectorSurfer's Performance is Trend Based
How can we tell that the trend signal we extract from the noisy market data really does drive SectorSurfer's performance? The Hurst exponent measures the quality of the trend signal and has a month-end bump in its character. This bump is a fingerprint likewise found in the character of SectorSurfer Strategy performance.
• See SectorSurfer's Trend Fingerprint on the Operational Theory Page for additional technical information.

Trend Signals Exhibit Stationarity
Stationarity refers to the character of a random process remaining the same, such as the distribution in heights of men, shoe sizes for women, or trend lengths in market data. Stationarity enables one to confidently manufacture shoes of various sizes even though the shoe size of the next customer is unknown. Backtesting provides assessment of market character. Stationarity in market character enables strategy design to learn from the past in order to improve one's batting average for future investment choices.
• See Trend Signal Stationarity on the Operational Theory Page for additional technical information.

SectorSurfer's Improved Technology

Background
"Diversify and Rebalance" was born with MPT (Modern Portfolio Theory) in 1950 when we had rotary dial telephones. Today the telecom industry has wireless digital cell phones with touch screens, video cameras, voice dialing, and GPS maps. But, the financial industry is still selling us 1950s diversify and rebalance?

Extracting the Trend Signal is Everything
If the EMH (efficient market hypothesis) were true, the future would be random and the Hurst exponent of market data would be exactly 0.5, but it's not, because market data contains significant trends. A trend means that information from the recent past tells you something about the near future. There is nothing more important than to apply the best signal processing technology available to extract the trend signal from noisy market data to improve one's investment batting average. (Here's why, MPT is blind to trends.)

Differential Signal Processing
One of the most fundamental methods for improving the signal-to-noise ratio in data communications is to eliminate common mode noise via differential signal processing. That's why it's built into Ethernet and USB. Most charting and analysis software evaluates ticker symbols independently, which taints the analysis with common mode market noise resulting in excess whipsaw losses reacting to noise unrelated to its own relative performance. SectorSurfer performs a simultaneous differential analysis to eliminate the problem.

Matched Filter Theory
Matched filter theory provides the mathematical means by which the trend signal can be optimally extracted from noisy market data. The well-known academic paper Profitability of Momentum Strategies, by Jegadeesh & Titman used the simplistic equally weighted SMA (Simple Moving Average) of length 6 months as its trend measure. Although typical, neither the SMA nor 6 months are near optimum compared to the Matched Filter Theory solution. Simply put: better trend signals produce better results. See this summary comparison.

Automated Strategy Optimization
Investors familiar with technical chart indicators know how tedious it is to determine which indicators and what parameters to use. SectorSurfer completely automates this process for you. Better results, less time!