In Buy–DON’T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk author Leslie N. Masonson lays out a strategy for individual investors to use relative strength to increase returns and reduce risk. His primary vehicle for doing so is ETFs. The first step in his process is to identify the individual investors personal risk tolerance. Once Masonson shows readers how to determine his or her risk level, he presents his methodology for determining the overall equity market’s primary trend.
Masonson uses what he calls “The Stock Market Dashboard” as a gauge for determining the overall market’s trend, which is his first step in determining whether to be fully/partially invested or in cash. The dashboard is comprised of seven technical indicators which are seemingly a random collection of well known indicators. While he gives historical evidence of the dashboards market timing capabilities in March 2009 and near the top in 2007, I would like to see more comprehensive and academic backtests. Also, I found myself wondering if the use of seven indicators was perhaps too complicated. Mebane Faber showed in The Ivy Portfolio that a simple moving average system can be effective in reducing portfolio volatility. However, to Masonson’s credit his site buydonthold.com tracks the dashboard signals so we will see how they perform out of sample in the months and years ahead.
The next step in Masonson’s process is to invest using ETFs when the dashboard indicates a positive market trend. However, he does not propose simply asset allocation models; rather, he suggests using relative strength to determine in which ETFs to invest. He provides a few free ETF centered websites to determine which ETFs have the highest relative strength. In addition to discussing these free sites, he wastes, in my opinion, a chapter promoting two separate pay services.
Masonson’s book also had a personal twist for this author. In chapter 6 he cites an article I wrote for Seeking Alpha and my site in October 2009. However, while I’m flattered to be a source, his citation was incorrect and somewhat lazy. My article (viewable here
) was primarily a review of a study done by CXO Advisory.
I was a secondary source, the primary source was the study done by CXO; thus, it would have been appropriate to cite CXO directly. However, to Masonson’s defense with new technology (the Internet) comes new obstacles for authors – the original URL from CXO is no longer valid but the updated article can be viewed here
. In addition, the title of my article was cited incorrectly in the book, the correct title is “Backtesting a Sector ETF Momentum Strategy” and not “Backtesting a Sector Momentum Strategy” as cited in the book.
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