How Saltydog plans to invest his cash pile

After switching a large chunk of his portfolio into cash ahead of the sell-off, Saltydog analyst Douglas Chadwick tells us which fund he's just bought more of and explains his strategy for spending the rest.

Playing it safe as markets tumble

As active momentum investors, at Saltydog we're continually monitoring our holdings and also looking for new trends to benefit from. Every week we analyse thousands of funds to see how the different sectors are performing relative to each other, and which are the best performing funds in each of those sectors.

We combine the Investment Association asset sectors into our own proprietary Saltydog Groups which are:

•    Safe Haven.
•    Slow Ahead.
•    Steady as She Goes.
•    Full Steam Ahead - Developed Markets.
•    Full Steam Ahead - Emerging Markets.

The nautical names of these groups give an easily recognisable indication of the volatility of the sectors and funds which are allocated to the groups. Using the performance data, it is easy to see whether the increased risk associated with the more volatile funds is then being rewarded.

Here's an extract from last week's data showing the performance of the sectors in one of the "Full Steam Ahead" groups.

Data Source: Morningstar. Past performance is not a guide to future performance.

(NB We calculate the sector returns, by taking the average return of the leading 50% of funds in each sector)

It was showing that in the previous week all sectors had gone up, but that they had seen significant drops the week before and had all gone down the week before that. All sectors were also showing cumulative losses over four and 12 weeks. It was a similar story in the other groups.

During September we doubled the amount of cash in our demonstration portfolios and that helped protect us during the falls at the beginning of October. Now our cash holding across the portfolios is around 70%, and it’s starting to burn a hole in our pockets. 

•    Why did this successful investor just double their cash holding?
•    Investors pile into these four safe-haven gold stocks

•    A 10%-plus dividend yield worth a nibble

It's tempting to look for any sign of good news and hope to get in on the beginning of any recovery. At times like this we need to hold our nerve and be patient. We know that getting in right at the bottom of a trend and getting out right at the top is almost impossible.

We should wait until a trend has developed before investing, then start small and only add to our holdings if the trend continues. When the trend shows signs of slowing we can then start to reduce our holdings.

As the famous momentum trader Jesse Livermore said "One of the most helpful things that anybody can learn is to give up trying to catch the last eighth - or the first. These two are the most expensive eighths in the world."

Since our last reports were prepared equity markets have started to fall further, and so this week's analysis will probably show that the upturn was short-lived.

Sometimes, when nearly everything else is going down, some things do go up.

In last week's analysis, there were some funds in the 'Specialist' sector which were performing well. 

Data Source: Morningstar. Past performance is not a guide to future performance.

We're already invested in the Investec Global Gold fund, but have now added to our holdings.

The Latin American funds also look interesting but are not for the faint-hearted. They tend to be heavily weighted towards Brazil and we like to keep an eye on the Ibovespa (an index that tracks stocks traded on the São Paulo Stock Exchange). In April it lost 2%, May it lost 14%, June it lost 8%, July it gained 12%, August it lost 11% and in September it gained 6%.

There have recently been elections in Brazil which will have affected the markets, however, once that has been allowed for it will be difficult for Latin America to carry on doing well, if the other major economies around the world continue to struggle.

For more information about Saltydog Investor, or to take the two-month free trial, go to www.saltydoginvestor.com.