Don’t Change Horses in Mid-Stream

One of the most important elements of investing is having a system and following it consistently. A good system makes investing easier, freeing you from constant decision-making. Even a simple rule like “sell after a 10% loss,” for example, frees you from constantly re-evaluating your holdings and deciding which, if any, to sell.

There are plenty of good systems out there, proven by the broad range of successful newsletters we review. Most investors will be better suited to some systems than others. If you’re patient and investing for the long-term, for example, you may be most comfortable with a Benjamin Graham-type value investing system.

Regardless of which system you choose to follow, one rule applies equally to all of them: Be consistent. Abandoning or ignoring your system because you’re reluctant to do what it’s telling you (often taking a loss, or giving up on a stock) is a surefire way to lose money in the stock market. The system is there for a reason; if you ignore it because you’re in love with a stock or afraid of losing money, it can’t work. And if you abandon your system whenever market conditions make it hard to follow (like being a growth investor in a bear market), you won’t be there to benefit when things change and it begins working again.

The value of following a system consistently is proven by Hulbert Financial Digest’s annual ranking of investment newsletter performance records. Switching to a system that has outperformed recently can be tempting, but Hulbert finds it would also be disastrous. Prompted by the fact that the newsletter that did best in 2010 was among the worst performers in 2011 (a frequent occurrence), HFD completed the following exercise:

“Consider a hypothetical portfolio that each year followed the investment newsletter model portfolio on the HFD’s monitored list that had the best return in the previous calendar year. Over the 21 years through this past December 31, this portfolio produced a 23.0% annualized loss. That’s equivalent to an almost complete wipeout. … The lesson I draw from these results is that the previous year’s returns are an unreliable foundation on which to base a decision about which adviser to follow this year.”

Instead, find a system that works for you, and follow it faithfully through thick and thin. Your consistency will be rewarded.

In keeping with the findings above, today’s Investment of the Week selection comes from a newsletter that consistently ranks well on HFD’s long-term performance charts. NoLoad Fund*X, edited by Janet Brown, is the best-performing mutual fund letter tracked by HFD over the past 15 years. (Adjusted for risk, it is the third-best performing.) It’s also the third-best performing of all newsletters tracked by HFD over the last 15 years adjusted for risk.

Recently, Janet Brown recommended this broad-market fund as her Top Pick for 2012:

“Large-cap growth funds led in 2011 and one of the easiest and lowest-cost ways to participate in this area is through PowerShares QQQ Trust (QQQ), an exchange traded fund (ETF) that tracks the Nasdaq 100 index. The Nasdaq is often considered to be a technology index, but although technology is a big part of the index, it’s more diversified than many people think, covering 100 large domestic and international companies. QQQ has 66% in information technology, 16% in consumer discretionary and 11% in healthcare. The Nasdaq also tends to avoid financial firms and this has helped performance lately as financials were one of the worst-performing areas in 2011. While there are many Nasdaq index funds, QQQ is very liquid and one of the most actively traded ETFs available.”

QQQ has delivered a stellar performance over the past month, and if the market remains strong, it will continue to do so.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week


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