All transactions are assumed to be at the closing net asset value. Unlike most mutual funds, the Selects are priced hourly during the market day. The maximum 3% load and Fidelity's small transaction fees are NOT included in the percent changes shown. All distributions and dividends are assumed to be reinvested, which has no meaningful effect on the rates and percentages shown. For comparison, the same period returns of the Vanguard Index 500 Trust (symbol VFINX), whose performance is close to the S&P 500 index, are also shown.
It should not be assumed that trades in the future following the Fidelity
Select Switching System will be profitable or will equal the performance of
the trades shown below.
Note: Buy prices marked by a * have been adjusted for a distribution by the fund between the purchase and sale dates. This distribution is assumed to be reinvested in the fund, which has no meaningful effect on the percent changes or overall rates of return shown. Sell or Index Buy Fund Sale/Exchange Buy Recent Percent 500 Date Purchased Date Exchange to: Price Price Change Change 12/30/96 Brokerage 3/31/97 Air Trans. 23.32 23.15 -0.7% 0.9% 1/6/97 Energy Service 2/10/97 Brokerage 22.16 20.66 -6.8% 5.2% 1/13/97 Energy Service 2/18/97 Brokerage 23.48 21.65 -7.8% 7.7% 1/20/97 Electronics 2/24/97 Home Finance 40.67 39.99 -1.7% 4.5% 1/27/97 Electronics 3/3/97 Home Finance 40.26 38.26 -5.0% 4.2% 2/3/97 Electronics 3/10/97 Retailing 41.59 38.44 -7.6% 3.6% 2/10/97 Brokerage 3/31/97 Air Trans. 26.04 23.15 -11.1% -3.4% 2/18/97 Brokerage 3/31/97 Air Trans. 27.30 23.15 -15.2% -7.1% 2/24/97 Home Finance 3/31/97 Air Trans. 46.81 41.74 -10.8% -6.4% 3/3/97 Home Finance 4/7/97 Air Trans. 45.94 42.25 -8.0% -4.0% 3/10/97 Retailing 5/5/97 Software 34.33* 34.87 1.6% 2.3% 3/17/97 Retailing 5/5/97 Software 34.86* 34.87 0.0% 4.5% 3/24/97 Air Trans. 5/19/97 Developing Comm. 19.12 20.38 6.6% 5.7% 3/31/97 Air Trans. 5/19/97 Developing Comm. 18.81 20.38 8.3% 10.4% 4/7/97 Air Trans. 5/19/97 Developing Comm. 19.64 20.38 3.8% 9.6% 4/14/97 Electronics 6/9/97 Defense 33.53 38.32 14.3% 16.4% 4/21/97 Transportation 6/2/97 Energy Service 23.23 25.15 8.3% 11.6% 4/28/97 Energy Service 6/23/97 Home Finance 20.15 23.55 16.9% 14.0% 5/5/97 Software 6/9/97 Defense 39.27 38.69 -1.5% 4.2% 5/12/97 Electronics 6/16/97 Insurance 37.93 37.90 -0.1% 6.9% 5/19/97 Developing Comm. 7/7/97 Energy Service 20.17 22.77 12.9% 9.7% 5/27/97 Energy Service 11/24/97 Retailing 23.05 30.82 33.7% 12.3% 6/2/97 Energy Service 11/24/97 Retailing 23.77 30.82 29.7% 12.7% 6/9/97 Defense 7/14/97 Energy Service 32.18 33.05 2.7% 6.6% 6/16/97 Insurance 8/4/97 Computers 35.86 38.60 7.6% 6.5% 6/23/97 Home Finance 8/4/97 Computers 46.09 50.45 9.5% 8.4% 6/30/97 Telecommun. 8/4/97 Computers 46.32 47.50 2.5% 7.5% 7/7/97 Energy Service 11/24/97 Retailing 26.00 30.82 18.5% 4.4% 7/14/97 Energy Service 11/24/97 Retailing 26.59 30.82 15.9% 3.7% 7/21/97 Computers 9/15/97 Energy Service 53.28 57.47 7.9% 1.1% 7/28/97 Computers 9/15/97 Energy Service 54.66 57.47 5.1% -1.5% 8/4/97 Computers 9/15/97 Energy Service 57.48 57.47 0.0% -3.0% 8/11/97 Computers 9/15/97 Energy Service 56.81 57.47 1.2% -1.6% 8/18/97 Paper & Forest 9/22/97 Biotechnology 25.04 25.51 1.9% 4.9% 8/25/97 Defense 10/20/97 Telecommun. 37.51 39.38 5.0% 4.1% 9/2/97 Energy Service 11/24/97 Retailing 31.05 30.82 -0.7% 2.4% 9/8/97 Energy Service 11/24/97 Retailing 31.18 30.82 -1.2% 2.0% 9/15/97 Energy Service 11/24/97 Retailing 33.35 30.82 -7.6% 3.2% 9/22/97 Biotechnology 11/10/97 Retailing 38.43 37.34 -2.8% -3.4% 9/29/97 Brokerage 11/17/97 Retailing 35.85 34.70 -3.2% -0.5% 10/6/97 Brokerage 11/17/97 Retailing 37.35 34.70 -7.1% -2.5% 10/13/97 Energy Service 11/24/97 Retailing 36.50 30.82 -15.6% -2.0% 10/20/97 Telecommun. 12/1/97 Utilities Growth 53.54 52.14 -2.6% 2.2% 10/27/97 Energy Service 12/1/97 Utilities Growth 33.38 29.53 -11.5% 11.4% 11/3/97 Money Market** 12/8/97 Regional Banks 1.00 1.0046 0.5% 4.8% 11/10/97 Retailing 12/29/97 Multimedia 44.13* 42.76 -3.1% 3.7% 11/17/97 Retailing 12/29/97 Multimedia 45.55* 42.76 -6.1% 0.9% 11/24/97 Retailing 12/29/97 Multimedia 45.56* 42.76 -6.2% 0.9% 12/1/97 Utilities Growth 2/9/98 Computers 48.15* 51.23 6.4% 4.0% 12/8/97 Regional Banks 1/20/98 Retailing 41.65 40.05 -3.8% -0.2% 12/15/97 Regional Banks 1/20/98 Retailing 41.40 40.05 -3.3% 6.6% 12/22/97 Insurance 2/2/98 Computers 38.60 39.44 2.2% 5.1% 12/29/97 Multimedia 2/9/98 Computers 31.01 32.17 3.7% 6.2% Note: Since the market closed early on 10/27/97 when the Dow was down 550 points, the buy price shown for Energy Service is the 3:00 PM price. If the markets had not closed early, it is quite likely that the 4:00 PM price would have been lower. Also, I do not know when Fidelity stopped accepting orders that day, so the 33.38 shown for Energy Service probably could not have been realized in actual trading. ** The system treats the Money Market fund like any of the other Select funds. That means the fund will be held for a minimum of five weeks although there is no penalty for selling it within 30 days. Another reason for the minimum holding period--to avoid being shaken out by a short-term pullback--also does not apply to the money market fund. However, the five week minimum holding period would have been needed to avoid being caught in the 1987 crash in the hypothetical backtesting of the system. Investors may want to use their evaluation of current market conditions to decide whether or not to impose the five week minimum on the money market fund. The sell price of the Money Market fund shown is not the 1.00 price of the fund, but that price plus an estimate of the interest that would be earned assuming an annual rate of 4.75%. To illustrate the use of the table, the "track" starting on 12/30/96, the closest Monday to the start of 1997, is: Buy Fund Sale/Exchange Percent Index 500 Date Purchased Date Exchange to: Change Change 12/30/96 Brokerage 3/31/97 Air Trans. -0.7% 0.9% 3/31/97 Air Trans. 5/19/97 Developing Comm. 8.3% 10.4% 5/19/97 Developing Comm. 7/7/97 Energy Service 12.9% 9.7% 7/7/97 Energy Service 11/24/97 Retailing 18.5% 4.4% 11/24/97 Retailing 12/29/97 Multimedia -6.2% 0.9% -------------------------------------------------------------------- Total return for "1997" (12/30/96 - 12/29/97) 35.1% 28.6% accounting for maximum 2% annual management fee 33.1% The calculation for the total return for the track is: (0.993)(1.083)(1.129)(1.185)(0.938) - 1 expressed as a percent.
Go to Current Trade list
The trades listed above illustrate how the system works. It is typical that most of the profits come from one or two large gains each year. In 1996, the best trades were in Retailing, Chemicals, and the trades in Electronics and Computers that were still open at the end of the year. In 1997 the best trades were in Electronics purchased 4/14, although that trade did worse than the index fund, and in Energy Service purchased in April-July.
The table shows that some trades may do much worse than the market. Testing on historical data and my actual trading experience show that Select Switching should make up this gap and then some if one will stick with the system. It may take some time. You can use the updates of the table to see how tracks starting with these trades perform against the market. Because sector funds can be quite volatile, I usually recommend that an investment in the Selects using the illustrated methods be phased in using two or three tracks over a period of one or more months. See Implementation Issues under System Description for a more detailed discussion of this topic.
You can see how Pankin's personal and client accounts have performed since November 1993 under Performance. The client accounts are managed using the switching system, but most accounts are invested in more than one fund at a time. This tends to reduce both the returns and the volatility. Consequently, the client accounts' average returns for 1996 and 1997 were less than the 1996 and 1997 returns for the tracks shown above and elsewhere on this site.
No claim is made that the system will perform in the future as it has in the past or as illustrated above. Also, there can be no assurances that the system will produce a profit in the future; it is possible that the system will produce losses.
January 1, 1998: Happy New Year! As most of you know, 1997 was another outstanding year for the U.S. stock market, and as the tracks illustrated above show, the Select Switching method also had a good year and outperformed the broad market as measured by the S&P 500, which was one of the best performing indexes. The last trade, in Retailing, was a disappointment and turned what might of been a fabulous year (returns in the 50% range) into a very good one. I would gladly settle for 30+% annual returns every year. However, that is not a realistic expectation. The last three years probably are the three best consecutive years ever for the U.S. stock market.
The track shown above starting on 12/30/96 is typical of what my research shows can be expected of the Select Switching System. There were five completed trades in the 52 week period that ended 12/29/97, and 5-7 is typical. Also, most of the profits came from two of the trades, and it is typical that most of the profits come from one or two trades a year that gain more than 10% each. The other three trades essentially netted out to a small gain. It would be nice if the gains were acheived steadily throughout the year without the volatility, both up and down, but the system does not work that way. The price we pay for the hoped for above market profits is the volatility inherent in sector fund trading, which includes some uncomfortable downside moves. Those following the strategy must be able to live with this behavior. If not, then alternative, less volatile investments, should be employed.
November 24, 1997: The long run in Energy Service finally came to end, and with a large bang rather a much to be preferred whimper. The plunge over the past week was probably unprecedented in that the fund fell 10.4% from the close on Nov. 17 to the close on Nov. 24 while the S&P 500 was essentially unchanged. On three of those five days, Energy Service fell by 4% or more and it did not recover much on the other two days. Obviously, it would have been better to have sold a week earlier when the fund was showing signs of weakness. It is expected that the system will sell after the top, and when a fund climbs as much as Energy Service did, it is also expected that when it falls, it will fall faster than the market. However, what we saw here is an extreme case, we hope.
Does that mean there is something wrong with the Select Switching System? Probably not. The system will stay with a fund with large gains through a rather substantial correction. Usually this works well, as it did in 1996 with Electronics, but sometimes it works poorly, as we just saw with Energy Service. No system works perfectly, and this one will produce some dramatic clinkers. However, the goal is to make trading profits, and I believe this system will do so in spite of the occaisional bad calls. I don't recommend trying to superimpose your own judgment on the system. Once in awhile, that will be an improvement, but most people are not right consistently enough to outguess the system. I know I can't.
It is important to keep things in perspective. If we knew in advance that the trade would do as well as it did when the broad market was up only a relatively small amount, we likely would have said something like "Great, I'll take it!" The "problem" is that the trade was ahead by a lot more in early November, and over half the profits on the July 7 purchase shown in the tracks above disappeared before the trade was over. While that is frustrating, it is far less important than the healthy profits that the July 7 to November 24 trade produced.
October 28, 1997: With the Dow down 550 on 10/27 and up 330 on 10/28, the past two days have tested commitments to stick with the program. Energy Service was down over 8% on 10/27 (although it held up quite well on the the 10/23 and 10/24 when the Dow dropped over 300 points), and it bounced back about 3% on 10/28. Other Select funds on the list above behaved similarly during those two wild days. Volatility like this is one of the "joys" or "hazzards" of investing in sector funds. The best way to handle days like these is to pay as little attention as possible to them, which can be difficult given all the coverage by the media, and stick with the system. It won't always be right, but for most investors, it is far better than the agony caused by worrying about how low the market will go and when is the right time to sell and buy back in after selling.
All of the funds that might have been purchased from 9/22 - 10/20 as shown above hit the 7% stop-loss level that could be used (see March 31 for additional discussion). That would have meant placing sell (or exchange to a money market fund) orders for execution at 10:00 AM on 10/28. As it turned out, that would have hurt since the market sold off in the first half hour before staging a strong recovery. That does not mean that stops are a bad idea or that one should abandon them after this bad experience. The main reason for using stops is to prevent really large losses such as those possible during the 1987 crash. Such a tactic is still reasonable. It won't always work well; nothing does. Also, it is not clear that the market drop is over. A week or two from now the stop may not look so bad. Moreover, if the decline had continued on 10/28, those who plan to use stops and did not do so this time because of a feeling that the market would bounce back soon would have been kicking themselves much harder for not executing according to their plans.
September 15, 1997: While the broad market has not shown much overall movement in the past four weeks (the index fund is up 1%), Energy Service has continued to climb. As I have said in other places, most of the profits from following the Selects Switching System come from one or two big trades a year. It is now evident that Energy Service is going to be the big trade for this year. The 12.9% gain in the prior trade in Developing Communications is also a strong contributor to the profits for the year. How high will Energy Service go? I make no claim to knowing. Rather, I will let the system tell me when it is time to switch out of that fund. Given its recent strength, Energy Service will likely be held for at least another two or three weeks. Also, it is quite likely that when it is sold, it will be somewhat below its peak. While it would be nice if the system would sell at the top, that is not realistic, and the primary objective is to make money, not to be able to brag about selling at the top. We had a similar situation with the Electronics trade that started in August 1996. That trade was up over 50% at the end of January, but the system held on until late February when the gains had dropped to the 40% range. I'm pleased since the same methods that held on too long in February enabled us to stay with the trade through several pullbacks in late 1996.
It may seem curious that Energy Service purchased April 28 would have been sold on June 23 while purchases of the same fund on May 27 and June 2 would not have been sold on that date. The reason is the five week minimum holding period that is part of the trading method. This minimum avoids the 0.75% penalty for selling a Select fund within 30 days and also prevents being shaken out by a hopefully temporary pullback, which turned out to be the case in late June. It would have been great if the April 28 purchase had also been held since it would be up 65%. That provides an illustration that the Selects Switching System, like every other system, is far from perfect. This is something we have to learn to accept.
August 18, 1997: The wild ride continues. After the weakness of the past two weeks, the Dow closed up over 100 after being down over 50 during the day, so that may be the end of the "correction." (And "cheating", the Dow was up another 100+ on 8/19). The dip certainly was scary, but system followers should not panic and try to outguess the market. Certainly there will be times when the system is wrong and it would have been better to sell on the intial weakness, but my research shows that over the long haul that is not going to work nearly as well as sticking to the system. The high techs did not get hit nearly as hard as the large cap indexes such as the Dow and S&P 500 and Energy Service held up fairly well, so in this instance, sticking with the system should not have taken too much courage.
July 21, 1997: The market continues to rise and the Select Switching System has caught up to the index fund for 1997 and edged ahead of it. The recent strength in the high technology sectors and Energy Service has caused what we hope is the "normal" course of events (i.e. well chosen sector funds outperform the broad market) to be restored in contrast to the first half of the year. This shows why one must stick to a proven system even when it does not seem to be working or working as well as we would hope. Six months, or even a year, is too short of a time period to conclude that something has gone wrong.
The values above are truly incredible for a little more than half a year. If the market did half as well every six months, everyone would stop working, invest in stocks, and just sit around and wait for their net worth to increase rapidly. But we know that can't or won't happen. How long will the market and the Selects Switching System continue to climb as this frenetic pace? Your guess is as good as mine; and to be honest, any predicitions are really guesses. Trying to outguess the market is a losers game. One of Martin Zweig's "laws" is that the market will do what it has to in order to make the majority of investors wrong (or at least feel foolish). It is better to take what the market gives us and count on time to recover from the declines. I know many who sold at much lower prices figuring the market was too high and could not go much higher or who are waiting for a good "correction" to buy back in or buy more.
June 16, 1997: Large capitalization stocks, the type that make up the S&P 500 index, have been extremely strong since their April lows. The S&P is up over 20% in a little more than two months. Consequently, it has been virtually impossible for any investment strategy or broadly diversified mutual fund to keep up with the S&P index funds recently. This is certainly the case for the Select Switching System. The numbers in the tables show that 1997 has been a good year for the system, but so far it is well behind the Vanguard Index 500 fund. The system will not do better than the index fund in all periods. However, research and past experience shows that it should do better over longer periods. Note that the system and the index fund are fairly close for the track that started at the beginning of 1996. That means that the Selects Switching System was well ahead two months ago. The 1996 returns illustrate the advantage for the switching system that year. Additional comparisons can be seen under Performance.
June 9, 1997: The high technology sectors have started to weaken, which is reflected by the sales of Electronics (purchased on 4/14) and Software. The purchases of Electronics on 5/12 and Developing Communications, which often acts like a high tech fund, have not yet been held for the minimum five weeks. If these sectors continue to underperform the market, they will be sold in the next two weeks. A merger of tracks is possible since two funds are being sold. The second ranked fund for this week is Energy Service, which was top ranked for the two previous weeks. See Feb. 10 (a) and the Implementation Issues for additional discussion.
March 31, 1997: The past month has been very hard on the financial services sectors, which includes Brokerage and Home Finance, the funds that held the top rankings throughout most of February. From time-to-time, the Selects Switching Strategy gets "out-of-synch" with the market. When that happens, trends reverse quickly, and new positions are at a loss even when the overall market has gone up. At such times, it is tempting to cut losses and move to another sector. However, my research over a ten year period shows that there are enough times when the dips are temporary and the rising trend resumes to justify the minimum five week holding period. Unfortunately, that was not the case in the current instance. The use of a 7% "stop-loss" can prevent some of the larger losses. My research shows that in the long run, using at stop-loss at this level (but not lower) should have little effect on the overall return. Whether or not to use it is primarily a matter of investment philosphy. See Implementation Issues (link below) for a further discussion.
No system, trading method, or individual is right with the market all the time. What is key to investment success is developing an appropriate method and sticking to it. There will be some "drawdowns" as we are having now, but if my research is right and the future is not too different from the past ten years, the system should produce gains that more than make up for the (I hope) temporary losses.
Since two funds are to be sold, there is a possibility of a merge of "tracks" of money this week. The second ranked fund in Energy Service, which is not correlated with Air Transportation (these two funds sometimes move in opposite directions). See Feb. 10 (a) and the Implementation Issues for additional discussion.
February 24, 1997: The long trade in Electronics finally came to an end. Purchases in August were up over 40%. While this was an obviously outstanding trade, there was an even better one in Electronics in March - September 1995. The 1995 trade lasted about the length of time as the recently completed trade, but returned from 55-70% depending on the particular purchase date. Note that Electronics purchased on 1/27 or 2/3 has not yet been held for the minimum five weeks and should be held for at least another week or two. Overall, the Select Switching System did a good job of staying with the trade through the various periods of turbulence. It is possible that Electronics will again resume its upward climb and that greater profits could have been obtained by holding on. However, no mechanical system will be right all the time. The idea is to be right enough times for large enough gains on the average to overcome the times when the system is wrong.
February 18, 1997: Had the recommended stop loss level of 7% (see last week (c) and Implementation Issues) been used for Energy Service purchased on 1/13/97, the result would have been a bit worse than the 7.8% loss shown above due to the mechanics involved and the 0.75% short-term selling penalty.
February 10, 1997: (a) Note that a merger of different "tracks" is possible this week since both Computers and Energy Service should be sold and switched into Brokerage and Investment Management. See Implementation Issues under System Description for a discussion on handling potential mergers and diversification. The number two ranked fund this week was Regional Banks. After adjusting for market changes, these two funds are not highly correlated. Consequently, those with a potential merger of tracks could put part of the sale proceeds into Regional Banks. Alternatively, this money could be put into the money market fund to wait for a Select fund other than Brokerage to be top ranked. (b) The high tech funds have again seen a sharp pullback (Electronics dropped by over 5% in the last week) after strong gains. This has been the pattern since mid-October. This latest pullback resulted in a sale of Computers. Only time will tell whether the move up will continue or whether we have seen the top. There is no point in trying to guess which it will be. The Select Switching System formulas will tell when to sell Electronics, the only high tech fund still held. The system has worked well in the past as can be seen in the gains in Electronics and Computers in the table. (c) Energy Service purchased on 1/13/97 is down 12%. This raises the question of whether a "stop loss" should be employed. This is discussed under Implementation Issues.
Go to Implementation Issues