The final investment decision: picking funds

Now we come to the final decision we need to make about where to put our money: which fund to buy?

There’s one thing to remember here…

When it comes to getting the best investment performance from the Saltydog system, the most important question is: Which sector is performing the best?

In other words, if you pick the right sector, but don’t necessarily choose the ‘perfect’ fund in that sector, you’re going to do well.

But on the other hand, if you pick a good fund without considering which is the best sector, you’re not going to do so well overall.

It’s getting in and out of the right sectors that’s the key to good performance.

So… our first step is always to pick the best-performing sector. As we’ve already covered, that means we need to:

• Identify a genuine trend – primarily using the 4-week numbers.
• Find a sector that is out-performing other sectors.
• Only pick a sector in a more volatile group if it’s significantly out-performing sectors in less volatile groups.

Once we’ve identified the specific sector we want to be in, then we have to pick a fund within that sector to buy.

How do we do that?

Let’s return to the example we just looked at, from May 2015, where we identified the UK Small Companies as the best-performing sector (See How you identify a worthwhile trend).

We can now move on from the sector data, and look specifically at the Saltydog fund data for the UK Small Companies sector. The fund table looks like this:

Full Steam Ahead Developed Group - 4 Week Data

As you can see, with each sector we show the top 6 best-performing funds.

And just like the sector data, we have a breakdown into 4-week, 12-week and 26-week performance.

Plus we have a week-by-week analysis of the last 8 weeks’ performance.

Though there is one important difference compared with the sector data – and that is that we use deciles as a way of measuring fund performance.

What are ‘deciles’?

A decile (pronounced “dess-ile”) is a method of indicating the performance of an investment fund over a period of time compared to its peer group (i.e. compared to all other funds within that particular Saltydog group), rated on a scale of 1-10. Number 1 indicates that the fund is in the top 10% of funds being compared, whilst 10 indicates that the fund is in the bottom 10%. We use decile ranking instead of the more common quartile ranking because it more accurately pinpoints the leading funds.

Detailed decile performance. With the weekly Saltydog data, we provide a separate data sheet which shows the decile performance for the last 12 weeks for all the top-performing funds.

When we’re picking a fund within a sector, the principle is essentially the same as when picking sectors:

• Which fund (in the chosen sector) has a strong 4-week trend?
• Is this fund in the top half of the sector i.e. not lower than deciles 1-5 ?
• Looking at the 8-week performance, does it consistently have a high decile ranking, or is it jumping up and down a lot?

Looking at the example table above, we can see that the Franklin UK Small Companies fund does pretty well on all these criteria:

• It has the highest 4-week return, of 5.7%
• It is in decile 1, and
• It’s been in decile 1 for three of the past eight weeks, and has been in the top half (deciles 1-5) for the past four weeks.

So within the UK Small Companies sector, which is where we want to invest, we would pick the Franklin UK Small Companies fund as our chosen vehicle – and put our money into that.

Read next > How do you decide when to sell?