The Power of a Plan

What holds you back from investing? For many people, it’s uncertainty. They put off investing until they feel more confident about where the market is headed. Other people assume that investing is about having the ‘right’ information; they believe that successful investors know something about the market that they don’t.

The truth is that future markets are always uncertain, and even the smartest people can’t predict which area of the market is going to deliver the best returns over the long term or which mutual funds will be the top performers years from now. What sets successful investors apart is that they have a clear plan that helps them make investment decisions now, even though they can’t know what the future holds.

A solid investment plan simplifies your investment decisions, helping you know what to do when markets inevitably change. It should help you:

• Keep risk in check, so you can stay invested through up and down markets.

• Adapt to many different market environments.

• Decide which funds to own now and when it’s time to move on to other funds.

• Determine the purpose and role each fund plays in your overall portfolio.

• Invest in a way that supports your long-term goals.

Your plan should be comprehensive, but it doesn’t have to be complicated. In fact, it should be simple, so you can and will follow it for decades. It can be a source of stability, something you can rely on, even in uncertain markets.

The FundX Investment Plan

Jason Browne, FundX chief investment officer, answered a few questions about our investment plan and how he implements this plan for shareholders of the Upgrader Funds.

Q How do you decide what funds to buy and when to sell a fund?

A When building a portfolio, we first determine how much risk we’re willing to take. For the Upgrader Fund (FUNDX), for example, we target market-level risk.

Next, we compare funds and ETFs that meet our risk criteria and select several that have strong recent returns. As we fill out the portfolio, we consider the potential diversification benefits of new buys and the liquidity of each fund or ETF to ensure that we can maintain our flexibility as markets change.

We monitor our positions closely, and if a fund doesn’t perform as well as other funds, we’ll replace it with a fund that has better recent returns. We don’t want to get stuck holding funds that are doing poorly, hoping that they’ll do better when the market changes.

Our ongoing process of selling funds that have weaker recent returns and buying into funds with stronger recent returns is designed to help us align with prevailing market trends.

Q How do you decide how much to invest in one particular area of the market?

A Our Upgrading strategy is a go-anywhere approach. We can invest in domestic and foreign funds, growth and value funds, and funds of all capitalizations.

We aim to invest in the areas of the market that are currently in favor, and we rely on recent fund performance to tell us which funds to own now. If domestic funds have strong recent returns, we’ll be invested in domestic funds. If both domestic and foreign funds are in favor, we’ll hold both U.S. and international funds.

When it comes to sectors, however, we intentionally diversify our positions. We’ll invest in a range of sector funds that have done well lately rather than concentrating our portfolios in a single sector.

In FUNDX, for example, we own a consumer staples fund, a consumer discretionary fund and a utilities fund. This diversification is designed to helps us manage risk: if any one of these funds fall sharply–which can happen with individual sectors–it will only affect a small portion of FUNDX’s overall portfolio.

Q Why do the Upgrader Funds hold so many funds?

A The simple answer is: if we knew in advance which fund would continue to do well indefinitely, we might own just one fund. But that’s not possible.

Our decades of experience has shown that some of the funds we buy today will continue to do well, and other funds will not. Rather than gamble on a few funds, we invest in many funds and then filter out any funds that fall behind.

Owning more funds can also offer greater diversification and that’s what we’ve seen in 2016 so far. We started the year focused on U.S. growth funds, but by quarter-end, we owned both dividend and growth funds.

As tempting as it can be to try and forecast which funds will do best in the future, we believe our efforts are better spent selecting our holdings based on what we can observe today as opposed to what we believe may happen in the future.

Q Some of the funds you own are not in the newsletter you publish. Why?

A As institutional investors, we are able to purchase many load funds without paying the load charges and we also have access to institutional funds that generally have lower fees than retail funds. The typical subscriber to our newsletter doesn’t have access to these funds so we don’t include them in the publication. 

Diversification does not assure a profit or protect against loss in a declining market.


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