Based on where the market was trading when I wrote Bitcoin, the Stock Market, and Other Asset Bubbles there weren’t any terribly attractive mainstream asset classes. So I put money to work in some contrarian positions that included EWY and FREL. Since then the market has been a bit more volatile and is off its 2018 peak. We’ve made a little money just because of dollar cost averaging combined with a sideways market, but we’re not exactly crushing it right now.
Volatility! Trade Wars! Trump!
The headlines are creating noise to try to explain what’s going in the market these days. The good news is that none if it is going to matter in the long-run. If you’re wondering what to do in the face of these headlines my advice is to ignore the noise and focus on implementing a strategy that is robust, stupidly simple, and dirt cheap. One of the easiest way to accomplish this goal is to go back to the ol’ standby of momentum trading to put new money to work.
Momentum Trading Asset Selection
The first step in implementing Momentum for Dummies is to select commission-free ETFs (we’re using ones from Fidelity) to mimic as many as the asset classes as possible:
- SHY: T-Bills
- IVV: US Large Cap
- IJR: US Small Cap
- IEFA: EFA
- IEMG: EEM
- IEF: US 10-year
- LQD: US Corporate Debt
- FREL: REITs
- FMAT: Commodities/Gold
There isn’t a good commission-free option for commodities or gold so I’m substituting FMAT, which is Fidelity’s Materials Sector ETF.
The crux of the Momentum for Dummies strategy is to take a look at the past twelve months performance and buy the second-best performing asset. That asset is then held for 12 months and the process is repeated.
Where’s the Exit?
I typically preach that a trader needs to have a well-defined risk management strategy that takes into account the macro environment and some sort of stop loss. The Bridesmaid momentum strategy doesn’t use one; however, you can always add a long-term moving average as a stop loss or diversify the number of ETFs you’re holding at any given time (e.g., hold the top 3 or 4 ETFs instead of the second-best performing ETF) to diversify asset-class risk.