Many professional investors assert “rules-based” investing as a strategy that takes the best of both worlds, fundamental and technical investment selection process. A crucial aspect of a rules-based investment strategies is derived from the establishment of rules which govern the investment decision-making process. These investment rules guide overall portfolio asset allocations, between equity and fixed-income, security selection and buy/sell/hold decisions for a client’s portfolio. The rules-based investment process is designed to remove emotion and personal bias, resulting a disciplined approach for the entire portfolio management process.
Rules-Based Investing is a decision-making process designed to align clients’ financial objectives with an individually constructed investment portfolio. Investment portfolios are constructed through a two-step process which include, both fundamental analysis and technical analysis. First, a fundamental analysis is utilized as a part of a selection process to discover potential investment candidates for a client’s investment portfolio. Secondly, a technical analysis is utilized to determine direction of market trends and individual security price/volume movements, on a continuous and ongoing process to monitor portfolio holdings for buy/sell/hold decision-making, only after the investment meets the fundamental analysis test.
Fundamental Analysis
Fundamental analysis relates to a rigorous security selection process which compares company business operating results with the respective industry/sector and overall market securities market designed to focus on company securities that rank the highest amongst the “universe” of potential candidates. This fundamental analysis is designed to select the “best of breed” companies for consideration as investments in a client’s portfolio. The fundamental metrics considered for ranking potential investment include:
- Sales Growth
- Earnings Stability
- Debt/Equity Ratio
- Earnings Per Share (EPS)
- EPS % Change Last Quarter
- Last 3 Quarters Average Growth Rate
- Return on Equity
- Stock Accumulation/Distribution
- Industry Group Rank
- Institutional Interest
- Quarters of Increasing Fund Ownership
Technical Analysis
Technical Analysis relates to the investment decision-making process which determines whether the overall market indicators are in a “positive” uptrend. Once the overall market conditions are positive, individual securities can be selected from the list of prospective securities investments generated by the fundamental analysis. Next, the securities selection process employs a “rules-based” investment selection process that is designed to focus on securities price movements and the corresponding trading volume for the relevant period. The “rules-based” process is applied on a continuous and ongoing basis, which is used to monitor various technical metrics for making buy/sell/hold decisions including many of the following factors:
Market Factors
- Put/Call Ratio
- VIX – CBOE
- Support/Resistance
- Trend
Individual Securities Factors
- Current Share Price
- Advance/Decline Line
- Moving Average
- Relative Strength Rating
- Average Daily Volume
- Support/Resistance
- Chart Pattern Formations
- Cup with Handle
- Double Top
- Double Bottom
- Sideways Base
Rules-Based Investing Approach Help Answer Questions
How to identify securities for your investment portfolio that is the most suitable for you? Why is the market trend important for investors? How to determine whether the market is in an uptrend or downtrend? How to detect a change in the market trends? How often should your portfolio be monitored for buy/sell/hold decisions? For answers to these questions, contact True North Financial Advisors for a detailed review of your investment portfolio.
Important Disclosures
True North Financial Advisors provides rules-based investment strategies in discretionary investment accounts designed to protect profits and limit losses. All investment strategies involve risk and may result in the loss of principal. Investors are encouraged to contact True North Financial Advisors for more details.
