How do I know if I’m suited for market timing?

Market timing can cause angst, typically after a few losing trades or when the market is moving in the opposite direction: up when you are in cash and down when you are invested. The following articles on our Web site will help you answer this critical question:

1. “Which is Better, Buy & Hold or Market Timing?”

2. “Do You Have What it Takes to Be a Successful Market Timer?”

3. “The Ugly Details of Timing.”

What type of funds can be used with these systems?

These four market timing signals can be used with just about any diversified U.S. equity fund. The timing models will not work with sector or international funds. To be diversified, a fund must hold stocks from most sectors in the S&P 500.

For each buy signal, invest 25% of your portfolio in your equity fund. If many funds are available to you, as is the case with a typical brokerage account or through a large fund family, you can reduce risk by using a fund from a different style box (large-cap growth, small-cap value, etc.) for each timing signal.. For more help, consult our Timing Model Portfolios, which are available on our Web site.

Should I buy all four mutual funds in 25 percent increments or one fund per buy signal?

Although either way is fine, we recommend purchasing and selling one fund for each timing signal. Buying four funds in 25% increments can create an occasional short-term trade when one system generates a sell signal a few days after another generated a buy signal. Fund companies have become very sensitive to frequent trading and may not allow your trades. Also, most brokerages charge short-term redemption fees-which lower your effective return using this timing strategy. Buying one fund per trading signal minimizes short term trades and redemption fees.

If you're following our model portfolios using Rydex funds or exchange traded funds, then you must purchase the fund specifically corresponding to the timing system. For example, if timing system #3 produces a buy signal, then the Rydex-Aggressive program will allocate 25% of the portfolio to the Rydex OTC fund.

If you're applying our signals in a 401(k) or an IRA account, then try to purchase a mutual fund that closely matches those recommended in our ETF portfolios. Practically every 401(k) account has at least an S&P 500 and small cap fund choice. If you don't have an exact match, do your best to improvise with the funds you have.

Why do the model portfolios use only Rydex and exchange-traded funds?

In response to the mutual fund trading scandal of 2003, fund companies have tightened restrictions in trading their funds. Rydex and exchange-traded funds are ideal for implementing market timing systems because both do not impose trading restrictions. Rydex funds have a higher expense ratio than exchange-traded funds; although a commission is charged to buy and sell the latter. Generally, the larger the portfolio, the more it makes sense to use exchange-traded funds. The approximate crossover point where ETFs become a cheaper option is when the portfolio is greater than $30,000.

What are the benefits of your firm doing market timing for me?

There are a number of value-added benefits to having a managed timing account with Merriman Berkman Next. Perhaps most important, we get the job done. A timing system is useless unless it is followed. Every business day, we update our market timing systems and our fund-timing systems, scanning thousands of mutual funds for buy and sell signals. We make the trades every time, without fail. Second, we expect our proprietary timing and fund selection systems to outperform the disclosed systems, even after our management fees are deducted. Third, we have an active research and development program to evaluate and develop new market-timing systems. Although changes are infrequent, this on-going process helps us maximize risk-adjusted returns for our clients. Fourth, you receive a thorough initial consultation, and periodic reviews, with one of our experienced investment advisors. This process will include an analysis of your entire portfolio, helping you choose the strategies (with or without timing) that are most suited to your needs and your risk tolerance. We work on a no-load, non-commission basis and often support other aspects of our client’s finances such as estate and tax planning.

How do the new tax laws affect my decision to use market timing versus buy and hold?

By its very nature, market timing is a tax-inefficient strategy since most returns are short-term capital gains. These are taxed at your marginal tax rate, while long-term capital gains and now stock dividends are taxed at a lower 15 percent rate. Therefore, we recommend that market timing strategies be placed in a tax-deferred account such as an IRA or your employer’s 401k plan.

What time during the day are the timing models updated?

Each morning, we evaluate the systems using the previous day’s market action. If there is a change, an e-mail alert will be sent and our website updated by 11 am Pacific time. These alerts typically provide three hours before the market closes to make portfolio changes. However, since these systems do not trade very often, performance is not affected much by waiting to make the trade on the next day.