Trade Alert Note: A strong market rebound of over 6% making a new high in over 6 weeks is a signal that indicates to Get-Back-in-Early without waiting until month-end. It indicates a renewed bull market appeaars to have taken hold and neutralizes any other conflicting StormGuard-Armor triggers.    

Scott Juds

Advanced Topics

Take SectorSurfer to the Next Level

  Portfolio Concepts       Investment Topics       Custom Strategies
 • Post-Surfing Diversification   Take Control, It Urgently Matters  • Great Strategies Overview
 • Make a Portfolio-of-Strategies    • Selecting Funds, ETFs and Stocks    • Clones versus Sectors
 • Allocation & Symbol Calculator    • The Prudent Investor Rule    • Common Mode Noise Reduction
 • Make a Motif Portfolio     • Stocks versus Sectors    • How to Build a 401k Strategy
 • Strategy Performance Bar Chart     • Minimums, Hold Times, Fees    
 • Return Probability Distribution     Fund Availability Depends ...     Advanced Options
 • Probability of Loss - Risk    Ultra or Leveraged Funds    • Forward-Walk Progressive Tuning
 • Sharpe, Sortino Ratio - Risk  Data Download Spreadsheet  • Advanced Charting Options
 • Rolling & Maximum Drawdown   Return vs. Execution Delay  • Advanced StormGuard Options
 • Score, Safety, Alpha and CAGR  • Backstops and Dual Defenses

Highly Recommended
How SectorSurfer Works
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 Essential Videos

Lower Risk?  (7min)

Higher Returns?  (5min)

Alpha Daily Brief  (7min)

AAII Seminar  (46min)
Lower Risk Higher Return Daily Brief Logo Diversification Heresy

StormGuard-Armor  (1min)

Dual Defense  (10min)

Bear Market Strategies  (4min)

Which Trend is My Friend?  (8min)
Dual Defense
Bear Market Strategy
Low Noise Momentum

  Portfolio Concepts

Post-Surfing Diversification
There are many kinds of, and opportunities for, diversification. For example, a company could be based on just a single product, or an array of products for the same market, or an array of products for different markets. Likewise, a mutual fund could be invested in multiple companies in a single market, or in multiple companies in many markets. A mutual fund could also invest in a combination of companies, bonds, and commodities. SectorSurfer uses yet a different kind of diversification that is called serial diversification, where one invests in multiple stocks or funds, but invests in only one at a time.

Serial diversification, directed through owning the one, and only one, best trending stock/fund in a set of candidates not only addresses the investment objective of improving returns, but also addresses the companion investment objective of risk reduction by inherently avoiding the trend laggards. It is instructive to note that a survey of SectorSurfer Strategies demonstrates that returns are inversely proportional to the diversification of the constituent stocks/funds of the Strategy. Stock Strategies produce the highest returns, sector fund Strategies next, and broadly diversified fund Strategies the least. Although risk is significantly reduced for each through serial diversification, it is primarily the longer term risk that is reduced through avoiding bad performance periods.

However, since the Strategy's stocks/funds are individually owned one at a time, their overall short term volatility is inherently embedded in the Strategy. Fortunately, there remains additional opportunity to reduce risk through post-surfing diversification.

Consider the four TopDog Stock Strategies shown to the right. Each is composed of a dozen individual stocks representing a separate slice of the market. It is easy to see that these Strategies are not well correlated simply by comparing the general character of the charts. Thus, because they are fairly uncorrelated, a portfolio that holds all four of these Strategies would certainly have less risk than any one of the individual Strategies.

Having a Portfolio with multiple Strategies is particularly important when investing in stock Strategies because individual stocks have daily volatility risk as much as 3.5 times higher than the S&P500 and can suffer significant one day drops. That's why a prudent investor risks no more than 20% of his assets in any one stock or commodity. Of course, sector fund Strategies and asset class fund Strategies are already fairly well diversified, thus post-surfing diversification is not as important, but still will offer worthy benefits in various measures of risk.

A Portfolio-of-Strategies is an allocation weighted average performance of a set Strategies. Click the chart thumbnail to the right to view the Portfolio performance of the combined four Strategies. Note on the square risk-reward chart how the Portfolio's yellow spot has moved meaningfully left indicating significant risk reduction. The comparative performance measures in the table below clearly demonstrate the significant value to post-surfing diversification, particularly with stock Strategies.

SectorSurfer Portfolio Chart
 Portfolio Chart:   Click to Enlarge Image

• How to Make a Portfolio-of-Strategies
Thumbnail of Portfolio Creation.A Portfolio-of-Strategies is an allocation weighted average performance of a set Strategies. A portfolio algorithm is one of "diversify and rebalance" versus selecting the one best Strategy as is done in a Strategy-of-Strategies.  Investing is like eating dinner. If steak, salad, and pie are on the menu, you can choose to cook, present, and eat them separately, or you can toss all of the ingredients into a blender, heat, and serve. The reason we don't do the latter is the same reason why your Portfolio's performance is better if you surf first then diversify (combine) later.

"P:" Identifies a Strategy as a Portfolio when it is the first two characters of its name. In the example Strategy listing to the right, the 5th one is named "P: TopDog Diversification." When the SectorSurfer algorithm sees the name begin with P: it knows that you have designated it to be treated as a Portfolio. A Portfolio's chart has a few notable differences that will be discussed below, and also restricts ticker symbols to be representative of a Strategy as specified below.

Ticker Symbol Format: Snn-w identifies it as Strategy # nn, where nn does not have a leading zero if it is only a single digit, and w is its relative allocation weight in the Portfolio. In the above example, the ticker symbols S1-3, S4-7, S2-5 and S3-4 identify Strategies #1, #4, #2, and #3 and their relative allocation weights of 3, 7, 5, and 4 respectively. In this example, the relative allocation weights sum to a value of 19 making the percentage allocations: 3/19 = 15.8%,   7/19 = 36.8%,   5/19 = 26.3%, and 4/19 = 21.1%  respectively. Each of these values are shown adjacent to its Strategy name on the Portfolio chart above. A Portfolio may reference any Active Strategy or Sandbox Strategy.

Rebal is the ticker symbol that will appear in the BUY and SELL portions of the Trade Information column. It is really more of just a place holder because there never really is any BUY or SELL, other than to occasionally "rebalance" your Strategies back to their target allocation weights, or optionally adjust the target allocation weights to match the account values.

Quarterly Rebalancing is used in the Portfolio chart algorithm to maintain the relative allocation weights of the Strategies. In practice, most people will not be able to rebalance between Strategies because the Strategies may be managing separate accounts, such as IRA, SEP IRA, 401K, 529 Education, or taxable accounts, between which balance transfers are not allowed. If you actually are interested in periodic rebalancing, doing so once a year is more than often enough because it is easily shown that long term performance is virtually identical whether you rebalance monthly, quarterly, or yearly. While the algorithm can rebalance freely and often, there is no reason to believe you must do the same.

Usage Notes:

1. Due to space limitations on the chart, only the first 8 Strategy ticker symbols will be shown on the chart,
    but all will take part in the calculations and charting.
2. When you click the chart icon, there will be a few seconds of delay before the chart is shown because the
    charts must be made fresh each time just in case you made changes to one of the underlying Strategies.
3. If you include a normal stock or fund ticker symbol within your Portfolio-of-Strategies, they will be assigned
    a default allocation weight of four as we are unable to otherwise assign allocation weights to ordinary symbols.

• Allocation Weight and Symbol Calculator
This calculator will generate allocation weights and the corresponding Strategy ticker symbols for SectorSurfer Portfolios simply by (a) entering the Strategy # on the My Strategies page, (b) entering the value invested in each Strategy into the Value column below, and (c) clicking the "Produce Symbols" button. Although the weight w is always a simple integer from 1 to 9, the calculator typically balances weights with a net average allocation error less than about 4%. 

Strategy # Value Allocation  Weight: w   Symbol
 * See Note
#1 Above.
No $ signs.
No commas.

Keep in mind that this is not an accounting exercise where the object is to count pennies accurately, but rather it is a finance exercise where the object is to understand and plan how and why investment choices are improved. The Portfolio chart is a tool for examining how different Strategy choices and different funding levels affect the risk and return of your overall investment portfolio.

How to Make a Motif Portfolio
A Motif Portfolio is probably best described as your own custom themed ETF — basically a basket of up to 12 stocks (or any ticker symbols) that you believe are meaningful together. The Motif Portfolio's resultant output is the simple equally weighted average of the performance of its constituent ticker symbols. You could create your own sector fund for Space Exploration, Organic Food, or Social Media, for example. A Strategy is designated as a Motif Portfolio simply by using ''P:'' in the start of its name. It can then be referenced/used in another of your Strategies just as if it were an ETF. Motif Portfolios are free because they render no buy/sell decision, and may live in either the Active Strategies or the Sandbox Strategies areas.

Note: Since our ticker symbols are limited to a length of five characters, there is no means available to specify an allocation weight for a stock or a fund within a Portfolio, and so we assign them allocation weight of four by default. Thus, you may mix normal ticker symbols (having allocation weights of four) with the special allocation weighted ticker symbols for Strategies described in the previous paragraph for a Portfolio-of-Strategies.

Portfolio Ticker Performance Bar Chart
The Portfolio Ticker performance bar chart allows a quick performance comparison between the constituent ticker symbols composing in the Portfolio, whether they be Strategies, ETFs or stocks. When you click one of the 3-Yr, 10Yr, or All-Yr blue buttons in the lower right portion of the main chart, the time scale will change accordingly for both this return bar chart and the main logarithmic line chart.


• Quarterly Return Probability Distribution
This chart shows the relative likelihood that a particular return will be achieved during any given quarter. Many important things about a Portfolio can be learned from this chart.

First, the shape of the S&P 500 curve is close to the bell shaped curve of a normal random distribution, but notably has a particularly fat negative tail. This means large drops are actually more common than would be predicted by standard statistical mathematics. 

Second, the spike at about 1% return for the Portfolio corresponds to a 4% annual return, and is the average return for a money market fund in past years. The spike is the signature of StormGuard taking Strategies to $CASH for extended periods of time during down markets.

Third, while the two curves are scaled to have equal area beneath them, it is notable that the S&P 500 is higher on the left half and lower on the right half of the chart. In effect, the act of SectorSurfing reduced the probability of lower returns (area in pale red) and increased the probability of higher returns (area in pale green).

Fourth, the Portfolio still has plenty of negative quarterly returns to go around. Although reduced, they are far from eliminated. SectorSurfer's algorithm is clearly can't predict or react to sharp market drops, as should be expected given that  many many days of data are required to reasonably extract the trend signal buried deeply in volatility noise. Randomly occurring punctuated events (such as volcanoes, financial/political debacles, or blowout earnings reports) upset old market trends and begin new and different trends. The important takeaway message here is that SectorSurfer will not save you from sharp downturns, but will save you from prolonged downturns, and will find the best trend between well spaced punctuated events.

  Building Custom Strategies

• Great Strategies Overview
Click to play a short video on this topic.Building a great Strategy is like cooking a great dinner. If you randomly select 10 food items from the pantry, it's possible that a good chef could find a way to make a reasonable dinner, but not a great dinner. However, if you select 10 food items based on the chef's recipe, the chef can whip up a superb dinner. Likewise one must choose stocks/funds for Strategies wisely. Please click and view the short video to the right to quickly and graphically see what matters in building a great Custom Strategy. Further review the important concepts follow below.

• Clones versus Sectors
There are no shortage of funds that are clones, or nearly clones of the S&P 500 market index. The charts to the right alternate between one with six nearly identical well-diversified Fidelity mutual funds, and one with six fairly different Fidelity sector funds. A 30%/yr. line is plotted on each for reference.

The yellow line is what SectorSurfer can do with each set of funds when only the one best trending fund is owned each month.

When all of the funds are nearly identical, there is very little to squeeze out of them by surfing from one to another. However, the improvement here still was about 3%/yr. above the average performance of the group.

However, when the market is deconstructed into its constituent economic sectors, one finds marked differences in performance between them that vary over time. When these differences persist for medium to long periods, SectorSurfer's algorithms can profitably direct investments accordingly. In this example, the improvement was about 18%/yr. above the average performance of the fund group.

The takeaway from this is that to build a high performance Strategy you need funds/stocks that have notable trend differences between them. The most notable differences are found between individual Stocks, then sectors, then countries, and lastly asset classes. Although individual stock can provide the most oomph for returns, they have significantly more volatility and are not likely to repeat initial growth spurts characteristic of their early lives. Conversely, market sectors and asset classes live forever and continuously rotate from one to the next as the economic cycle proceeds.

• Common Mode Noise Reduction
In the chart to the right, one can see that the first five sector funds have what is called "common mode noise" because their short term movements are well correlated. Conversely, the short term noise of the gold miner and bond funds are not at well correlated to the first four.

In order for the algorithm to dependably select the best trending fund, sufficient noise must be eliminated to reliably extract the trend signal. Since "the best" is an act of comparison, then differential noise reduction is what matters.

The differential noise between the first four funds is really pretty small compared to the differential noise between any of them and either the gold miner fund or the bond fund.

After the punctuated event (market drop) in August, one can see trend differences start to develop between the four sector funds that become well established toward the end of 2011 and into 2012.

However, the noise of the gold miner fund is measurable larger than that of the sector funds and is sometimes correlated with the sector funds and other times is oppositely correlated. Conversely, the bond fund has comparatively almost no noise. The differential noise for either of these two funds, compared to the sector funds, is much greater than the differential noise between any two of the sector funds. Addition of funds with high differential noise to a Strategy can have consequences!

The first consequence is that if one adds either of these two types of funds to a sector fund strategy where all sector funds are short-term correlated as shown in the above chart, the SectorSurfer algorithm will usually (but not always) increase the amount of filtering so that it can optimally extract the trend signal from the remnant differential noise. Increased filtering leads to longer time constants, more sluggish decisions, and an increased susceptibility to sharp trend reversals.

The second consequence is that along with the advent of greater noise comes the increased probability of not selecting the best fund, but instead selecting one with lower performance because its higher noise mislead the decision.

Money market funds and bond funds have the problem of having comparatively too little noise, whereas commodity funds have the problem of having comparatively too much noise. Commodities include: precious metals, real estate, chemicals, currencies and specific agricultural items. All of these are different in character from funds of companies that manufacture products. They move to other drum beats. You may be most surprised that real estate (REIT) funds are in this group. They are often thought of as sector funds, but in reality they are highly sensitive to interest rates, employment, and land values - none of which are related to profitability derived from manufacturing products.

• How to Build a 401k Strategy - Just 8 Simple Rules!
All of our Listed 401k Strategies were built with the simple rules listed below — and you can too, with no prior experience! The reason this is true is that 401k Plan Custodians are inherently excessively conservative, and thus all 401k Plan fund lists contain broad asset class funds and index funds, such as US Large Cap, EAFA International Index, Russell 2000 Index, etc.  As a result, it is easy to make a concise set of rules for building a SectorSurfer 401kk Strategy from them. (Note: If you are one of the lucky ones with a company plan that allows you to dabble in sector funds, be very glad, and keep in mind that the below rules start bending a bit as you incorporate funds that are more volatile or independently whack-a-doodle.)

In order to get started, you must first obtain the current fund options list for your 401k Plan. If you don't already have that, your company human resources manager can provide it to you. Note that some plans offer more of a defined benefit, which is a guaranteed payment based on annuities rather than a mutual funds. Unfortunately, you cannot trade annuities like you can mutual funds, thus SectorSurfer cannot help you with an annuity-based retirement plan. However, most of the time you can convert an annuity based plan to a mutual fund based plan so that you can use SectorSurfer. Generally you can quickly tell the difference because annuities have names, but no ticker symbols, whereas mutual funds that can be traded always have ticker symbols.

If you have questions about what can be done, or would like help building your 401k Strategy, please Click This Link to contact us and make an inquiry. You will be strongly encouraged to do as much as you can by yourself (this is a do-it-yourself site), and then ask for assistance. Be sure to send us what information you can so we can help you better. Note that while the following rules-of-thumb will produce an excellent Strategy, there may be reasonable exceptions to some of the rules depending on the nature of the fund in question. So, use these rules as a starting point, and then tinker.

The Rules:
  Exclude money market funds. StormGuard provides a much smarter means for going to $CASH.
2.  Exclude most bond funds. Pimco Total Return and long-term treasury bond funds are sometimes exceptions.
3.  Exclude Lifecycle funds, which are an asset class mix compromise that never helps Strategy performance.
4.  Exclude REIT funds (real estate investment trust). Their commodity-like character reduces trend reliability.
5.  Exclude small-cap index funds. They are more generally too chaotic and disruptive for 401k fund Strategies.
6.  Exclude your company stock. Individual stocks are generally too chaotic and disruptive for 401k fund Strategies.
7.  Include at least one from each remaining type, such as large cap, mid cap, world regions, value, growth, etc.
8.  Click the information icon, click the Show Advanced Options button, select StormGuard-Armor, and then if you
     have a treasury fund or a bond fund, put its ticker symbol in the Bear Symbol text field and verify that it helped.

  Investment Issues

Why Taking Control Urgently Matters

Diversify and Rebalance HypnotistDiversify 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.

Why 10% MattersAn 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.

• The Prudent Investor Rule

The Prudent Man Rule stems from the 1830 court decision of Harvard College v. Amory instructing trustees to "observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." This is the basis of the 1994 Uniform Prudent Investor Act. While the Act states "prudent investing ordinarily requires diversification," it further states that "there is no automatic rule for identifying how much diversification is enough" as it depends on the circumstances of wealth, age, taxes and risk tolerance. Let's call it the Diversification Uncertainty Rule.

Diversification Types:  Horizontal, Vertical, Serial
Armed with the wisdom of the Diversification Uncertainty Rule; let's consider how the different types of diversification can help an "ordinary investor" with "ordinary circumstances," starting with type definitions.
• Horizontal Diversification is like a sector fund that invests in multiple companies in a single market.
• Vertical Diversification is like a balanced fund that invests in multiple markets and/or asset classes.
• Serial Diversification is like serial monogamy and is what SectorSurfer Strategies do by sequentially owning the one, and only one, best stock/fund of the Strategy's companies, sectors, or asset classes. 

Asset Class Fund Strategies

These Strategies, like most 401k Strategies, are inherently well diversified and thus are sufficiently prudent.

Sector Rotation Strategies
Sector funds are diversified against pops and drops of individual stocks and apply serial diversification to reduce sector risk. These are also prudent.

Stocks & Commodities Strategies + Post-Surfing Diversification
Individual stocks and commodities have daily volatility risk as much as 3.5 times higher than the S&P500 and can suffer significant one day drops. A prudent investor risks no more than 20% of his assets in any one stock or commodity. Five Strategies produce useful Post-Surfing Diversification.

• Fund Minimums, Hold Times & Fees

Fund Classes:  Clones w/ Fee Structure Differences
It's typical for mutual fund companies to create clones of their funds that differ only in the fees charged. For example, FELIX, FELCX, FELAX, FELTX, and FELBX, are all clones of FSELX, Fidelity Select Electronics. The assets of each are held and managed in common; just the fee structures and trade hold rules vary to better suit retail, advisor, custodial and institutional markets.

Minimum Account Balance

Some companies, such as BlackRock, offer fund classes requiring minimum purchases as high as $1Million, or fund classes with fees on a sliding scale of the amount invested.

Hold Time & Early Trade Fee
If we have this information, you can see it in the Find-A-Fund popup and in the fund name when you put the mouse pointer over a ticker symbol. Strategies with fund hold times should use the Trade Automatic setting to abide by these limitations. Funds with 30-day hold periods, such as Fidelity Sector funds, are no problem. Funds with holding periods beyond 60 days start to become problematic in a changing market and should be avoided if possible. Online brokers always provide hold time and early trade fee information. Verify your funds reflect it properly.   Read more HERE.

Brokerage Trading Fees (Commission)
1st Rule:
Commission-free trades for lame funds are never a good deal.  2nd Rule: $50 trading fees at a brokerage for prominent mutual funds is excessive. Consider an account at the mutual fund company.

• Fund Availability Depends ...

Fund Classes:   Clones for Retail, Advisors, Custodians, and Institutions.
It's typical for mutual fund companies to create clones of their funds that differ only in the fees charged. While the assets of each are held and managed in common; the fee structures and trade hold rules vary to better suit the retail, advisor, custodial and institutional markets.

Each fund company has its own class codes, and each has its own set of hold time and early trading fees associated with each fund class. Whether you select a Strategy of funds built by someone else or you select funds for your own Strategy, you must determine that each fund is actually available to you based on the class of customer you are. A name search on Yahoo Finance can help identify fund clones.

The Bottom Line
Ideal fund terms include no initial sales charge, no deferred sales charge, no minimum hold period, and no early trading fee. Funds with these terms exist, but generally impose a 90-day freeze on further trading if you buy and sell them in less than 30 days twice in a 90-day period. This isn't a problem for month-end trading Strategies. Likewise, funds with 30-day hold periods and early trading fees are also not a problem for month-end trading Strategies. Funds with front or back end sales charges must always be avoided!

Stocks vs. Sectors & Asset Classes

Rotation vs. Fitting
Rotation implies something will be back time and time again, whereas fitting implies it has more sporadic properties that just happen to meet the current need. SectorSurfer's algorithm is agnostic as to which of these is really the case and simply strives to select the one best trending stock/fund of the Strategy. The question for investors is: "Does a superior past performance imply a superior future performance?" The answer lies in whether the performance was based on a rotational sequence or a fitted sequence.

Sector Rotation and Economic Cycle Chart• Sector Rotation occurs as the economy cycles from boom to bust and back again, favoring different market sectors during different portions 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. Market sectors will still exist decades from now regardless of the fortune or demise of individual companies.

Only by owning the trend leader and avoiding the laggards can one simultaneously improve returns and reduce risk.  That's True Sector Rotation!
• Asset Class Rotation
is another dimensional slicing of the markets, typically dividing its universe into large cap stocks, small cap stocks, foreign stocks, bonds, and treasuries. Likewise, asset classes will always exist regardless of the fortune or demise of individual companies, each rotating in and out of favor throughout the economic cycle.
• Individual Stocks
are constituent components of sectors and asset classes, and thus inherently have a rotation component to their performance. However, the most successful growth companies typically have just one historical period when they truly were rising stars, doubling in value many times over a period of years. Eventually market saturation limits growth and they become a stodgy large cap stocks, or lose their way and fizzle. Expecting a dozen past rising stars to be future rising stars truly is gold fever talking.
• Freshly Fit for Duty?
  Strategies built from equities that primarily performed well in the past because of sector or asset class rotation are inherently fit for future duty. However, if rising star performance is sought, the Strategy must be composed of stocks that are current rising star candidates, not those that were shining brightly 15 years ago. We recommend that you periodically (annually) refresh the candidate list.

• Ultra or Leveraged Funds

Leverage is used to buy more than $X worth of investments with only $X of cash by taking out a loan to pay for the excess amount purchased. For example, in a typical home purchase, you might be required to put down 20% of the home value and then take a mortgage loan for the remaining 80%.  This would be 5:1 leverage since you only have 20% skin in the game. In the stock market it is called a margin loan. Margin is defined as the portion that you actually own. For example, if you put down $100K for $150K worth of stocks, you used 50% leverage on your money and your margin (what you own) is 66.67% of the total.

Leverage Also Multiplies Risk
Leverage can be dangerous - witness MF Global, Lehman Brothers and Washington Mutual. These banks/brokerages were allowed to use over 30:1 leverage on various bonds and mortgage-backed investments, which means they only had 3% skin in the game. A drop of more than 3% in the value would mean that their entire equity had been lost and they had gone bust. Guess what happened? This is also the reason why so many people who were allowed to put down very little on their home purchases are now under water and owe more than the home is currently worth.

While you can't directly apply leverage to stocks or funds in a retirement account, you can own inherently leveraged ETFs and mutual funds in a retirement account. It is because inherently leveraged funds actively adjust the margin back to a safe level daily that you can never go bust.

When you make use of 2x leveraged funds the daily volatility will be magnified 2x and produce a much bumpier ride. However, your long-term returns will be double ... hopefully to your benefit.

• Data Download Spreadsheet

By clicking the History icon on the My Strategies page you can view the Trade Signal History for the Strategy along with numerous other statistics useful in your analysis of the Strategy's character . At the bottom of the Trade Signal History listing you can further click the button to download a CSV (comma separated variables) spreadsheet of all the important  Strategy statistics and trade signal history. The control bar along the topside of the charts also contains a CSV button, which when clicked will also retrieve the spreadsheet.

• Strategy Return vs. Execution Delay

How Returns are Calculated
Strategy returns are calculated using the closing prices one market day after a trade signal is generated. If you are trading mutual funds, it should be easy to exactly match the reported performance of the Strategy - provided you trade on time. If you are trading stocks or ETFs, you would have to put in an effort to try to trade at the end of the day - but you could do it. But, that gives you a whole day to try to get a better price by one means or another - is that not part of the game?

Strategy Execution DelayKeep in mind that SectorSurfer is not an accounting tool for tracking every nickel, but rather it is a finance tool for improving investment decisions. They are two very different things.

Execution Delay Example
The chart to the right was produced with the aid of the desktop software version of SectorSurfer which can simulate imposing a delay in trade execution following a trade alert.

This example Strategy "Fidelity Simple Sectors" is representative of the effect for Strategies in general. While the plots for other Strategies wiggle differently, as would be expected, the story is the same. A short delay in execution is generally pretty meaningless in the grand scheme of things.

Net-net, while the market may open up or down and may vary widely over a day, what is important is not the change from the closing price, but the difference in change between the Buy and Sell over this short interval. The majority of variation is common mode noise. Thus, simply be executing both the Buy and Sell transactions at approximately the same time, the short-term market noise is inherently subtracted out and becomes almost irrelevant.  Furthermore, regarding any differential noise that remains, sometimes you win and sometimes you lose, but in the long term what matters is the average of many such trades. Given that there are about 4 Sells and 4 Buys per year, it is apparent from the chart that the average effect per trade is really quite small and arguably is lost in the noise the grand scheme of things.

However, it should be noted that when trading individual stocks or commodity ETFs, there is significantly more differential noise in the data and the wobbles in the line shown above would be expected to be larger. Significant gains and losses often occur in a single day for individual stocks, and shifting the decision day by a few days would be expected to result in some lucky, or unlucky differences.

Advanced Charting Options

Flex Cart Span
 The Flex Chart refers to the chart made by clicking the top blue chart button on a SectorSurfer chart, and always uses "3-Years" as the default value, as can be seen in Chart-1 below.  Valid entries for the Flex Chart Span specification include specifying the number of years (such as 8.33), a date (mm/yy/dddd), or any of these case sensitive words: YTD, Month, Quarter, or BornOn. The shortest time span accepted is 30 calendar days. If a date is selected that is not a market day, the specified date will change by a day or two accordingly. When the Advanced Options window is initially opened, the Flex Cart Span value is set to its default value of "3", meaning that a 3-year span chart is specified. 

Less Spaghetti
Sometimes when you look at a chart you may wish the upper price chart had "less spaghetti" so you can see the funds of interest better. When you check this box, the chart will be rendered with only the top four trending stocks/funds along with both the Strategy and white reference fund.   

White Reference Index
This option determines what is plotted in white on the chart as the comparative reference fund. The Automatic option is the default setting used by SectorSurfer. It uses the dividend adjusted S&P 500 as the reference unless the name of the Strategy includes any of the words  "income,"  "bond," or "safe" in any form, in which case it then uses the Lehman Bros. Aggregate Bond Index.  Of course, specifically selecting the S&P 500 option will cause it to be used, and specifically selecting the AGG-Bond option will cause the Lehman Bros. Aggregate Bond Index to be used. Selecting the Average option will cause it to use the equally weighted average daily performance of the constituent stocks/funds in the Strategy that have historical data on that day.

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