A very successful strategy I have used for many years is to take advantage of the free trades most discount brokerages provide on select ETF investments. There are several brokerages that compete in this area and I subscribe to a few of them (I have 260 individual Free ETFs at last count).
Free trades make this possible, you can buy and sell a single share and earn a fraction of profit of the realized gains- you would never be able to do this if you were paying commissions on the trades.
As you know, I’m quite comfortable with the security of these investments (see Dollar Cost Average) and there is a lot of allocation strategy similar to the Waterline Strategy.
First, I calculate a contribution amount that I can sustain over the course of time, similar to the way you would contribute to a mutual fund or strategy or retirement plan. This capital is allocated to a cash position. This cash position is then used to create a differential amount. The default differential is “+1”, meaning every period I will buy 1 more ETF than I sell. The prices vary substantially between the ETFs, from hundreds of dollars for a single share to less than $10, but as long as the share count is consistently increasing, I feel like the strategy is more than sustainable in the long run. Managing Investment Cash Flow
Second, I review the current positions, I will buy shares of the most beleaguered shares if they are less than 5% of the market price (this is only for rescue and not contributing to low-volatility/stable value investments). Buy purchasing more, I’m improving my average cost (see Non-retirement allocation) and with ETFs, they always come back up in value and make you look like a genius.
Third, I take all available ETFs and line them up in my momentum rank, and flag the bottom 20%. I do not reward volatility when ranking momentum.
Fourth, I contribute to only 3% of the funds. This keeps me buying more shares of a few rather than a few shares of many. It also reduces my keystrokes. I’m doing it to the top momentum shares, with all of the flagged shares from the past 5 period removed. I also examine the sectors to make sure I’m diversified. If the market is down, all of the bonds will flood the top (because everything else is negative), so I will limit my bond investments. If a sector or country is hot, I will limit my exposure to such investments, taking the best and moving the rest out, replacing them with next in line of a different sector.
Fifth, I will flag all of the shares bought to make sure they are recorded in a schedule to prevent wash sales and other fees. If a share is sold within 30 days of being purchased, it is a wash sale and in some cases a brokerage can then charge commission on the trade.
Sixth, I will flag all of the shares that are underwater, I only want to sell shares that include realizing gains (not losses). Because I am only selling a portion of my position, I’m not guaranteed that my costs will be covered in the share price, but I just want it to be close.
Seventh, I will flip the momentum ranking and sell off the shares from the bottom of the rank. They must be held for 30 days and be in positive territory. Of these, I will sell the squared root of the position. I had some trouble in determining how much to sell of what was being triggered, I needed a formula, and the squared root works perfect because it works great with low numbers (such as 1) and it is consistent with high numbers.
Then I will sell only as many as my differential permits. If I’m buying 30 shares and my cash threshold supports a +1 differential, I will sell 29 shares. If my cash account is large, my differential will grow to accommodate this, +2 or +3 will quickly erode cash. If my cash account is low, my differential will fall to +1 or even zero. I will keep the differential at zero because zero is still sustainably generating profits.
If the market is bad and there is not enough positions to sell, I will simply scale back on the number of shares being purchased. By being consistent with the differential, you can control your cash very well and sustain the strategy indefinitely.
If there are no positions to sell, I will humbly buy my contribution amount. This is much less than the amount determined by my cash flow, but it will keep my strategy moving forward during this dark period. If I am optimistic, I will buy more depending on the amount of cash in the account, as these are unique and special times with generally a lot of opportunity. In my experience, the purchases made during these periods often turn-out wonderfully.
The yields will vary dramatically as you are selling shares from all over the place, but the revenue is consistent and the different asset classes play very well off of each other in various market conditions.