The investment methodology begins with our pick list of mutual funds.  See our Fund Selection Criteria to learn more about how we select our funds.  This section discusses how Kinetic Financial buys and sells these mutual funds in order to maximize portfolio returns and manage risk.

Target Market Exposure
Kinetic Financial first begins with a Target Market Exposure which can range anywhere from 0% invested in the market to 100% invested in the market.  There are times, however, when we may leverage our investments and increase our market exposure beyond 100%. 

Our Target Market Exposure depends on the characteristics of the Model Portfolio (low, medium, or high risk tolerance) and current market conditions.  For example, a moderately risked portfolio in market that has been trending upwards for past several months would have a Kinetic Financial target market exposure between 80% to 90%. 

In an up market, the Kinetic investment methodology would increase market exposure by buying the strongest positions in our Mutual Fund select list (see Fund Selection Methdology).  In a down market, Kinetic Financial would decrease market exposure by selling our weakest positions.  In a relatively neutral market, Kinetic Financial would hold steady at our target market exposure.

At the start of a strong upward trending market, Kinetic Financial would increase market exposure by investing approximately $3 for every $1 gained, depending on the portfolio’s risk tolerance profile.  Kinetic Financial would taper off these investments as the upward trend diminishes, eventually investing in approximately $1 for every $1 gain, depending on the portfolio’s risk profile.  Kinetic Financial will continue investing new money until our Target Market Exposure is achieved.

Similarly, at the start of a strong downward trending market, Kinetic Financial would decrease market exposure by selling approximately $3 of our weakest positions for every $1 loss, depending on the portfolio risk profile. Kinetic Financial would eventually taper off this liquidation as the downward trend diminishes, eventually selling approximately $1 of our weakest positions for every $1 loss.  Kinetic Financial would continue liquidating our positions in a down market until our Target Market Exposure is achieved.

Accumulating Positions through Pyramiding Positions
When investing in a mutual fund, Kinetic Financial starts out with a small position and then pyramid upward as the fund makes us more and more money.  For instance, when we start investing in a mutual fund on the select list (see Fund Selection Methodology), we’ll start with a small $5K or $10K investment.  Once we are confident that the upward trend is continuing, we’ll continue to buy positions in the mutual fund in $10K lots.  This way, we’re letting our winning mutual funds grow over time while limiting our exposure to the losing mutual funds.

Kinetic Financial recommends mutual funds based on the fund manager’s historical performance and the recognition of an upward trend.  Pyramiding has the other benefit of limiting our risk if we invest at the peak of the market since we do not accumulate positions when the mutual fund is trending downward. 

When it comes time to sell a mutual fund, Kinetic Financial uses the same pyramiding technique.  We sell the mutual fund in lots based on the performance.  If performance is really poor, we’ll liquidate our position using two or three different sell dates based on the size of our position.

In general, you’ll loose money faster than you gained it when the market trends downward. So, it is natural to liquidating your weakest positions faster than you accumulated them in a down market.

Mutual Fund Fees
The cost of selling a mutual fund is also carefully considered with the Kinetic Financial investment methodology.    Although Kinetic Financial generally tries to select mutual funds that have no transaction and deferred fees (see Fund Selection Methodology), we may sometimes select funds with fees when the performance is justified. 

There are complex rules to understanding the fees associated with buying and selling mutual funds.  For example, a brokerage firm will usually charge a short-term redemption fee if you buy a no-load/no transaction fee mutual fund and sell it within 180 days.  However, the brokerage will usually not charge a short term redemption fee if there was a transaction fee or if there is a fund imposed redemption fee for the mutual fund.

Here are some examples of fees changed by the broker, mutual fund family, and Uncle Sam:

Brokerage fees

Transaction fees – possible buying/selling fees imposed by the Broker
Short term redemption fees – possible fee if position is sold within 180 days

Mutual fund fees

Front end load - possible sales fees paid to the mutual fund when buying it. Kinetic Financial almost always avoids funds that charge a front end load.  However, most professional investment advisors will recommend mutual funds with front end loads because they are awarded a sales commission from the mutual fund firm.  Front end loads are often classified as Class A shares and charge a fixed percentage of assets upfront.

Back end load – possible sales fees paid when you sell a mutual fund.  Kinetic Financial almost always avoids these mutual funds. Back end loads are often classified as Class B shares and charge a fixed percentage of assets when selling the fund.

Redemption Fee – possible redemption fee paid when you sell a mutual fund.  Redemption fees are usually scaled based on holding time. For instance, a fund might charge a 1% fee if the mutual fund is sold within 12 months and 0% thereafter.  Kinetic Financial tries to avoid these fees if possible, but is willing to pay this fee if the performance justifies the extra expense.

Contingent deferred fees – similar to redemption fees, this is a possible fee charged when you sell a mutual fund, usually scaled based on holding time.  Contingent deferred fees are usually charged with Class C mutual funds. Kinetic Financial always prefers contingent deferred fees to front-end (Class A) and back-end loads (Class B).  Kinetic Financial will only choose a fund with a contingent deferred fee if the performance justifies the extra expense.

Penalties – possible fees charged if you sell a mutual fund within a certain amount of time. For example, some funds will change a 2% penalty if you sell a mutual fund within 30 or 60 days.  Kinetic Financial almost always avoids penalties when possible, unless there is a sudden market drop that forces us to quickly reduce market exposure.

Uncle Sam Fees

Cost Basis – For tax purposes, your investments in mutual funds will have a costs basis which is used to determine your capital gain.  There are several ways to account for the cost basis, including lots, average cost basis, last in first out (LIFO), first in last out (FIFO).  Kinetic Financial attempts to minimize tax implications by accounting for buy and sell transactions with lots.  When possible, Kinetic Financial will first note which investments lots result in long term capital gains.  Then, we’ll choose those long term lots that minimize the capital gain.  In general, Kinetic Financial tries to deter capital gains taxes as long as possible, unless we are attempting to offset gains and losses. 

Short term capital gains – short term capital gains tax applies if a mutual fund is sold within 365 days.  However, short term losses can be offset with short gains.  Short term capital gains are taxed at your normal federal/state income tax level.  Kinetic Financial’s goal is to avoid short term capital gains taxes when possible.

Long term capital gains – long term capital gains tax applies if you sell a mutual fund after 365 days.  As of 2005, it is taxed at a rate of 15%.

Wash sales – Under the wash sale rules, if you sell a mutual fund for a loss and buy it back within the 30-day period before or after the loss-sale date, the loss cannot be immediately claimed for tax purposes.

As part of the Kinetic Financial investment methodology, we carefully track key parameters of our Model Portfolios. 

Here are some examples of what Kinetic Financial tracks and why we track it: