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I was wondering if anyone knows of a way to best allocate my investment funds when using a Market Timing approach. For example, I have a market timing system I developed and tested since 2005. Every year it has shown excellent results from a return percentage perspective; however, from a dollar perspective it has not generated as much income as I would have hoped for.

After doing some research most of it points to the fact that my investment amount, say 100K is not fully invested at all times, just a portion of it is (10%) on each trade I am signaled to enter. What I am trying to figure out is a formula on how I can be almost fully invested at all times, but still be able to enter into new trades as the system signals them.

My system tracks 30 ETFs, and at any time I can be in from 1 to many trades, so how can I stay almost fully invested, and yet have money when new signals are generated. I hope this is clear, but perhaps an example will help. If on Jan 1st 2014 I am signaled to buy 5 ETFs, and I invest 20K into each of them, and then on Jan 10th, I get a signal to buy 5 more different ETFs, I won't have any investment money to buy this second set. The first set of 5 may generate a 5% return or a loss, but the second set may generate a 25% return, I can never be sure which set will be the biggest winners so I'm trying to be fully invested at all times to have the greatest chance of getting the best dollar amount return.

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    The pros can't get market timing right.... Good luck. – keshlam Dec 17 '14 at 15:37
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    Why not just use margin to get beyond 100% invested if the system is so good? Just a thought. – JB King Dec 17 '14 at 18:26
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    @keshlam - if by pros you mean fund managers, then they don't try to time the market, they are to busy rebalancing their fund's market allocations. – Victor Dec 17 '14 at 22:46
  • Kelshlam, I know the pros can't do it, but it is probably because they aren't trying to do it. I agree with Victor, that if we by pros you mean fund managers, they are not trying to time the market. Here are the results of my system since 2005 respectively: 2005: 4.42%, 2006: 8.52%, 2007: 39.57%, 2008: 380.26%, 2009: 109.16%, 2010: 116.04%, 2011: 99.80%, 2012: 179.25%, 2013: 81.91%, 2014: 239.55%. – Frank DiJohn Dec 22 '14 at 22:02
  • I am not publishing these to brag or "blow my own horn", I'm just reporting what the system has done on percentage returned each year. These percentages are using the "Aggregate Analysis" method, not the "Return on Investment Analysis", which is why I posted my original question of how to stay fully invested. – Frank DiJohn Dec 22 '14 at 22:14
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Instead of a simple buy signal, you need to be able to rank your investments from strong to weak on the buy scale and sell the weaker investments that you already own to buy the stronger investments that you have received signals from.

  • You could place a target on each investment and if that investment has not reached the target by a certain time or by the time you get new signals, you can sell out of these poorer performers and replace them with the new ones. Also you can have a stop loss on each investment so that if the price moves against you the market will get you out to keep any losses to a minimum and protect your capital. – Victor Dec 17 '14 at 22:51
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    Hi Victor, the system I use does this already. I never enter a trade either long or short without entering a stop loss for that position. In addition, at the close of each day the system recalculates what the stop loss should be and then readjusts it for the next day. This is obviously a trailing stop which eventually is hit and that is how the system exists its positions. – Frank DiJohn Dec 22 '14 at 21:50
  • Nathan, as for ranking the investments to determine the ones to invest in would basically make the system ineffectual. The bottom line is I really don't know which one of the 30 ETFs will have the best return. So, I have to trade each one the system determines; I can't further determine whether ones is better or worse than the other. – Frank DiJohn Dec 22 '14 at 22:17
  • I would need further details of the system and its indicators to offer you any further advice. – Nathan L Dec 22 '14 at 22:44
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You will have to rebalance every time your Boolean Buy flag is true.

You buy 20% of each fund then next week you have to sell down to 10% of your first 5 funds and buy 10% of the second 5.

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    And of course if you've got all funds saying buy or sell at once, you do nothing... unless you're willing to thrash it all out into cash and back in. And remember that every transaction means more of your profit is going to be taxed at short-term rates, and may cost you transaction fees depending on what you're trading in and how. – keshlam Dec 17 '14 at 15:39
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    @keshlam - if you are holding an investment just so as not to pay short term CGT then you have a losing strategy. I would rather pay some tax and transaction cost on a profit rather than not pay any tax and transaction costs and watch my investment half in value. – Victor Dec 17 '14 at 23:26
  • @Victor: I haven't found that the latter situation occurs often enough to matter, whereas the former definitely does. But I'm in index funds rather than individual stocks, and they DON'T tank except when the entire market tanks. – keshlam Dec 17 '14 at 23:36
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    @keshlam - and how long does it take to recover once the market has tanked. At least a couple of years. You would be better off taking some profits, paying a little tax and waiting for the recovery to start, rather than losing half your capital and two or more years to recoup it. – Victor Dec 17 '14 at 23:56
  • @Victor: Matter of taste, I suppose. I rode out the recent depression and all it cost me was no growth for the duration -- and if I'd pulled the money I'd have had to put it somewhere else, with few if any better choices. Admittedly I had a nice long horizon to play with and no need to tap the funds before they'd recovered, but that should be true for many investors, for the majority of their money. My experience disagrees with your theory; I may have been lucky, or your proposal may be less solid than you make it sound. – keshlam Dec 18 '14 at 2:34

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