CAPS

Capital appreciation ultimately depends on three factors. The amount we save, the rate of return we obtain and the length of time we invest.

The rate of return we obtain is therefore one of the key elements in this formula for wealth creation and ultimately the meeting of our long-term objectives such as retirement.

No one has a crystal ball to see the future, but through trial and error, analysis of systems that work, I have come to the conclusion that two key factors should obtain a better return on investments.

Factor number one is the market trend. The trend is the direction the overall market is moving. It moves up, down or sideways. Expressions such as “a rising tide raises all ships” and the “trend is your friend until the end when it bends” are market sayings that are based on proven experience. When the market is in an uptrend most companies stocks rise. When the trend is down most stocks decline, no matter how good the fundamentals of a particular company are. This is just a fact.

Accordingly the first element in a system to try and  improve the rate of return is to be aware of the market trend. There is no hard definition of the trend but 3 proven “technical indicators” as shown may help determine its direction. As per the upper chart on the right, the first indicator is the Toronto Stock Exchange or the TSX. Since we live in Canada this exchange gives us the best indication of the trend with the companies we know best, ie. those of our own country. The second index that can be used is that of the S&P500 which is an index of the 500 largest companies in the US. This index could represent a proxy for the trend of the world. When the current index value is above a 200 day average of these indexes we could say the trend is up. (Green up arrow) When the current market reading is below we could say the trend is down. (Red down arrow) The third indicator of use is what is called “seasonality”. The old market saying “Sell in May and go away” has been shown to foretell the fact that the trend is usually down in the summer and up in the winter.

As a result when the three arrows are up we have an uptrend. When they are down we have a downtrend. When the arrows are up we may wish to orient our investments to a higher level of growth and when they are down we may wish to scale down to more balanced conservative funds.

Factor number two for improving our rate of return is picking the best investment vehicles available. Mutual funds are an excellent vehicle as they minimize market risk by being highly diversified. A run of  Canadian based mutual funds to determine which have been consistently “5 star funds” can help us make up an “Ultimate funds list”. Through continual analysis and orientation to top quality funds one should hopefully be able to reduce some risk and hopefully improve the rate of return.

I call an awareness of the above a  “Capital Appreciation Protection System” or CAPS.

Market Trend

(click to enlarge)

 

Ultimate Funds

(click to enlarge)