Taylor&Williams - personal wealth advisor

May was a good month for investors and now has the stock market in positive territory for the year.  The S&P 500 was up 5.6% for the month and is now positive 3.0% year to date.  Of course, that still leaves the stock index down 40% from its high in October of 2007.  We are ahead of the index even, yet still concerned that the summer could hold some tough days.

The positive run is creating some changes in our portfolios, so we thought it would be a good time to explain how we decide which mutual funds to use and when it is time to change.  There are 2 parts to this discussion, ALLOCATION and FUND SELECTION.  We will cover allocation some other time and focus today on fund selection, since that is driving the changes we are making. 

Our fund selection process is all based around short term performance or return.  We take the 3 month, 6 month, and 12 month returns and add them together.  We call this total Momentum.  In each asset class, we take all the funds that we can get at Schwab without a transaction fee and sort them from highest to lowest based on that Momentum total.  As long as the fund that we are using is in the top 25% of the list (the top quartile of the available funds), we continue to hold it.  When it drops below that top 25% mark, we sell it and buy with the proceeds one of the top funds on the sorted list.  This process was researched and developed by a group called Sound Mind Investing.  Austin Prior and his team are an experienced, God following group.  We have tweaked their system to make it usable for us, but still follow the Momentum structure.

I will give you an example:  We purchased Parnassus Equity Income as our Large Growth fund back in June of 2008.  As the stock market was starting to fall, they had the highest Momentum total.  Parnassus remained in the top 25% until this past month, May 2009.  As the market direction was changing, other funds passed them up.  So on May 12, we sold Parnassus and bought TCW Galileo Select.  This process is our way of following the market trends and the fund managers that are doing the best in each period.

 As May ends, two more of our current funds have dropped below the top quartile mark:

-          UMB Scout Stock fund has dropped, and we are replacing with the Yacktman fund in the Large Value category.
-          Heartland Value Plus fund has dropped, and we are replacing with Dreyfus Small Company Value in the Small Value category.

 You will be receiving trade confirmations on these.  Since we only use funds that do not have any transaction fee, these changes do not cost you anything.

 Having an investment strategy that is not subject to the emotions of the market roller coaster is important.  The discipline of following the performance numbers with hard rules as to when to make changes enables us to avoid the panic and overoptimistic emotions, yet make changes as market direction dictates.