If JLFMI's Risk Model indicates that the environment is suitable for investing, the second decision is what to invest in. At any given time, some areas of the market are performing well while others are doing little or nothing. Therefore, it is neither productive nor even conservative to diversify across all segments of the market. This type of diversification only dilutes returns during uptrends while often providing inadequate protection in downtrends.
Our philosophy on investment selection is to concentrate on the best performing areas of the market. We use our revolutionary Fund Selection Model to regularly analyze thousands of funds to identify those that currently have the potential for the best future performance relative to other available funds.
How does the
Fund Selection Model work?
Our proprietary Fund Selection Model is the product of perhaps the most extensive relative strength-based fund selection research that's been undertaken. The construction of the Model was the result of exhaustive testing of the effect of hundreds of factors and combinations of factors on the resultant price performance of mutual funds over various time periods.
The Fund Selection Model is comprised of multiple statistical inputs derived from the historical price behavior of the individual funds.There are two main types of inputs involved: cycle position and risk-adjusted performance. The cycle inputs measure a fund's position relative to its historical highs and lows. The risk-adjusted performance measures each fund's returns over several time periods, short, medium and long-term, taking the fund's historic risk level into account. Together, these inputs are designed to target a fund's potential for out-performance versus other funds by measuring its position in its own price pattern and by measuring its short, medium and longer-term performance relative to its implied performance based on its risk characteristics.
Trends in the stock
market tend to last for quite a while, and the Selection Model aims to
identify attractive funds early enough in their uptrend that we can
exploit their continued strength for an extended period of time. The
Selection Model was designed to identify those funds with the greatest
odds of exhibiting positive future performance -- with maximized excess
future returns going forward to at least 5 months. Significant shifts
in the Selection Model do not occur so often as to imply frequent
investments changes as the Model was inherently constructed to avoid
such a condition. However, when a fund's rating does drop below a
predetermined threshold, it is sold and replaced by one at the top of
the list, thus maintaining an investment concentration in stronger
segments of the market.