Stock Upgrading:
Stock Upgrading is a “momentum” strategy built on the idea that recent performance tends to persist. The strategy normally diversifies accorss five stock fund “risk categories”.
Stock Upgrading attempts to own the best-performing stock mutual funds and ETFs (collectively, “underlying funds”), regardless of what the current market environment may be. The Stock Upgrading strategy has been a principal investment strategy recommendation of the Sound Mind Investing newsletter, a separate entity, to thousands of subscribers since it began publication in 1990.
In this strategy we continually monitor and rank thousands of mutual funds in order to determine which ones have been performing the best recently. We purchase the underlying funds showing superior performance relative to their peer group, and hold them until they stop outperforming. When that occurs, those lagging funds are sold and replaced with other funds showing stronger recent performance.
Stock Upgrading is based on research indicating that, as economic conditions change, market leadership rotates among companies of different sizes, and among different investment approaches.
While market conditions are constantly changing, fund managers rarely change their approach. Managers that excel under one set of market conditions are often only average (or worse) under a different set of conditions. Rather than buy a fund and hold it through both the periods that favor the manager's approach and the periods that don't, Stock Upgrading attempts to seek out and buy those funds that are excelling right now. We make no attempt to predict which funds will lead the market in the future. Instead, Stock Upgrading helps us to gradually move into funds that reflect the market's continually evolving leadership. While most investment approaches focus on long-term performance as the key to determining which mutual funds will succeed in the future, we believe the opposite is true. Research has shown that funds exhibiting superior performance in recent months tend to continue to perform well in the following months. As a result, we focus only on returns over the past 12 months in determining which funds are the best candidates for ownership. This approach to selecting new funds, coupled with a strong discipline to replace lagging funds, is the key to the Upgrading strategy. The Stock Upgrading strategy typically invests in underlying funds in the following six “risk categories.”
- Large-Cap Value
- Large-Cap Growth
- Small to Mid-Cap Value
- Small to Mid-Cap Growth
- International (which can be replaced with commodities and domestic ETFs)
- Non-Diversified
These broad category definitions make a wide range of investment opportunities available.
Note that the “2.0” update to the Upgrading strategy enables the managers to shift part of (up to all of) the Upgrading 2.0 portfolio to cash.
SMI Funds Using Stock Upgrading |
% of Fund’s Portfolio Typically Using This Strategy |
SMIFX |
100% |
SMILX |
40% |