Beat the S&P 500 and Top Funds with a Simple Strategy

THE BOOK INVESTORS USE TO BEAT THE
S&P500 & TOP PERFORMING MUTUAL FUNDS
BASIC
STRATEGY
WWW.IBEATTHESTREET.COM
Alton, Christopher

WWW.IBEATTHESTREET.COM CHRIS@IBEATTHESTREET.COM
Page | 1
A little about this book….
To be honest, I was not always good with money. As a matter of fact, I was horrible with money for much of my life (ironically, my
MBA focused on Finance and Economics… go figure). I think my transition from making poor financial decisions to becoming
financially literate uniquely qualifies me to write this short book. The training I’ve received as a FINRA Licensed Financial Advisor
and Financial Analyst, as well as my educational background, has helped shaped my financial perspective. But my real education
in Personal Finance came from the “school of hard-knocks” in which I experienced very challenging financial scenarios. I
understand through first-hand experience the struggles associated with living from paycheck to paycheck. I know what if feels like
to lose money on poor investment decisions.
Overall, my goal with Basic Strategy and the associated financial tools is to help you answer a few specific questions: What should I
invest in? How do I do it? When should I buy? When should I sell?
This is not a “stock picker” or “get rich quick” book. I simply combine and tweak several investment strategies developed by some of
the brightest minds in the financial industry. You will not find advanced investment products, complicated math or difficult to
understand financial terminology (like Alpha, Beta, Ex-Dividend Date and PE Ratio).
This book is about a simplified approach to investing with allows for the opportunity to outperform the returns of the S&P500 and
top performing Mutual Funds.
Who will benefit from this information?
1. The 32% of Americans who are investing in their company sponsored 401(k) plans
2. The “50 somethings” nearing retirement who are concerned their current returns are not enough to create the nest egg
necessary to last throughout their golden years
3. The 1% with more than $1,000,000 in investable assets who are sick and tired of their Financial Advisor’s excuses for
lagging market performance
The information within can be helpful for any level of investor, but it is most applicable to those who are interested in taking control
of their investments. If you SERIOUSLY WANT to navigate your personal investments with intention, this book is for you.
I hope to influence your financial decisions in a way which will make you better off as judged by you, and give you a few things to
think about when it comes to achieving meaningful financial goals for you and your family. Enjoy!
Christopher A Alton

Page | 2
________________________________________________________________________________________________________
WHAT’S INSIDE
________________________________________________________________________________________________________
Page 3 A Few Financial Terms (very few!)
Page 6 Introduction
Page 12 What to Invest In
Page 17 How to Invest
Page 21 When to Invest
Page 32 Bringing It All Together
Page 34 Applying This Strategy to Your 401(k)
Page 36 About the Author
Page 38 Appendix

Page | 3
________________________________________________________________________________________________________
FINANCIAL TERMS
________________________________________________________________________________________________________
I hate using financial terms which are not part of everyday language, but I must use a few to explain my overall strategy. I’ve briefly
lined them out here. But don’t worry… there are only 10 topics to review and should take less than 10 minutes to fully understand
all the concepts.

Page | 4
Benchmarking
A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured.
Generally, broad market and market-segment stock and bond indexes are used for this purpose; such as the S&P500 Index.
Rebalancing
The process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a
portfolio to maintain an original desired level of asset allocation.
Dollar Cost Averaging
An investment technique of buying a fixed dollar amount of an investment on a regular schedule, regardless of the share price. The
investor purchases more shares when prices are low and fewer shares when prices are high.
“Dogs of the DOW” Theory
Proponents of the Dogs of the Dow strategy argue that blue-chip companies do not alter their dividend to reflect trading conditions
and, therefore, the dividend is a measure of the average worth of the company. The stock price, in contrast, fluctuates through the
business cycle. This should mean that companies with a high yield, with a high dividend relative to stock price, are near the bottom
of their business cycle and are likely to see their stock price increase faster than low-yield companies.
Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. The logic behind
this is that a high-dividend yield suggests both that the stock is oversold, and that management believes in its company's prospects
and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above-
average stock-price gains as well as a relatively high quarterly dividend.
“Small Dogs of the DOW” Theory
The Small Dogs of the Dow offers a slight twist on the above investment strategy. Simply take the five lowest-priced Dogs of the
Dow stocks and invest an equal sum in each stock.

Page | 5
Capital Gains Tax
Capital gains are profits from the sale of a capital asset, such as shares of stock, a business, a parcel of land, or a work of art.
Capital gains are generally included in taxable income, but in most cases are taxed at a lower rate.
Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or
less. Taxpayers in the 10 and 15 percent tax brackets pay no tax on long-term gains on most assets. Taxpayers in the 25-, 28-, 33-,
or 35- percent income tax brackets face a 15 percent rate on long-term capital gains. For those in the top 39.6 percent bracket for
ordinary income, the rate is 20 percent. Short-term capital gains are taxed at the same rate as ordinary income.
Diversification
Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this
technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a
lower risk than any individual investment found within the portfolio.
S&P 500:
The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the
market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
It covers about 80 percent of the American equity market by capitalization.
Sectors of the S&P500
The 500 companies in the S&P500 fall into one of eleven sectors:
Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Real
Estate, Telecommunication Services and Utilities.

Page | 6
________________________________________________________________________________________________________
INTRODUCTION
________________________________________________________________________________________________________

Page | 7
Founded in 1984 by entrepreneur and stockbroker William O'Neil, Investor’s Business Daily (IBD) is a conservative American
newspaper and website covering the stock market, international business, finance and economics. In March 2018 the website
published an article titled, “Best Mutual Funds Awards By Category: U.S. Diversified Equity.” (https://www.investors.com/etfs-
and-funds/mutual-funds/best-mutual-funds-awards-by-category-u-s-diversified-equity/)
This article highlights the best U.S. diversified equity funds from 2008 to 2017 based on each fund outperforming the S&P 500 over
the last one-, three-, five- and ten-year periods. The article goes on to identify the best-of-the-best funds based on 10-year
performance.
The five identified best funds over the 10-year period ending 2017 include:
• T ROWE PRICE NEW HORIZONS
• EATON VANCE ATLANTA CAPITAL SMID CAP I
• BROWN CAPITAL MGMT SMALL CO INV
• VIRTUS KAR SMALL CAP GROWTH I
• PRIMECAP ODYSSEY AGGRESSIVE GROWTH
As an investor myself, I wanted to test my strategy against these funds to see how my returns compare to the best of the best. To
do so, I downloaded the month-end pricing for each of the funds from Yahoo Finance between Jan 2006 and October 2018. I
selected this timeframe for a few reasons: (1) I wanted to test the full results of the October 2007 – March 2009 recession against
each strategy and (2) I wanted to test the most up-to-date results through 2018.
To measure performance for the S&P500 and each individual fund, I assumed an initial investment of $1.2m on Jan 1, 2006. The
investment was dollar cost averaged into each strategy over the course of 2006 at a rate of $100k invested on the first of each
month. The total growth of each strategy is outlined below:
• The S&P500 grew by 88% over this timeframe
• The best performing Mutual Fund grew by 198% - more than double the S&P500

Page | 8
• My sector investing strategy grew by 275% - more than triple the S&P500 and outpacing the growth of each of the best
5 mutual funds

Page | 9
I’m sure you are skeptical. I was too. When I applied the strategy to historical data and reviewed the results, I was confident I must
have a formula error in my spreadsheets and the outcomes were miscalculated. But after dozens of iterations, recreating models
and quadruple checking the math, I am convinced in this strategy’s ability to not only beat the S&P500, but also outperform the
great majority of mutual funds available to investors… I’ll let you decide for yourself.
P.S. –
The strategies outlined in this book are meant for U.S. Equity Investments only. For most investors a balanced portfolio comprises
several Asset Classes; including, but not limited to, Stocks (U.S. and International), Bonds and Cash. Other asset classes include
Private Equity, Real Estate, Hedge Funds, Commodities, Precious Metals, Art and other alternative investments. The following
suggestions are not meant for your entire portfolio. They are meant only for the portion of your portfolio dedicated to U.S. Stock
investments.

Page | 10
________________________________________________________________________________________________________
WHAT TO INVEST IN AND WHY
________________________________________________________________________________________________________

Page | 11
As an investor in the US, you have about 4,000 publicly traded companies to choose from to fill your equities portfolio. With so
many choices, it’s no wonder most of us find investing so confusing. Who has the time, except for professional traders, to do the
research necessary to make informed buy and sell decisions?
The strategy I’m about to explain is a simple method to diversify across the market using exactly eleven investments. Benefits of
this strategy include:
1. Researching eleven options is much less complicated than researching 4,000
2. These specific investments provide the opportunity to beat the performance of the S&P500
Without any further adieu, the eleven investments are listed here. You may notice
only ten investments in the list; the eleventh option is cash.
Why invest in the S&P500?
Have you heard of the investment manager Warren Buffet? (rhetorical question)
Warren Buffet is considered by many to the be the best investor of modern times. He
is one of the five wealthiest people in the world and he made his fortune by investing.
His average annual return is about 20%, while the S&P 500 has returned an average
of 11% over the past 50 years.
In 2008 Warren initiated a ten-year, $1,000,000 bet with the money management
firm Protégé Partners. The bet was simple: Buffet bet he could generate a better return from a single Index Fund over a 10-year
period than a group of professional money managers who could invest in whatever US and/or International assets they wanted.
So, what did Buffet invest in? Buffett picked the Vanguard 500 Index Fund Admiral Shares (which invests in the S&P500 index).
He bet this single, unmanaged fund would perform better than a team of professional investment managers.

Page | 12
What did the Fund Managers invest in? An undisclosed fund-of-funds with positions across a range of hedge funds. In other
words, they invested in highly complex investment vehicles which were chosen by Investment Managers who earn millions for
investing money for clients.
In September 2017 (a few months short of the 10-year mark), Protégé Partners paid the
bet in advance because they were too far behind to catch up. The S&P500 Index fund
was up 85.4% - which equates to an annual compounded return of 7.1% net of fees.
Protégé’s annual compound return (net of fees) was a meager 2.2%.
I like Mr. Buffet’s advice, and I also recommend investing in the S&P500 ETF (Symbols
SPY or VOO). These ETFs are diversified across eleven market sectors and include 500
of the largest (not necessarily the 500 largest) companies whose stocks trade on either
the NYSE or NASDAQ. The top 10 companies are listed here.
Why invest in sectors of the S&P500?
As the S&P500 is composed of eleven sectors, it makes logical sense a portion of them will perform better than the overall index
(lifting the index value), while a portion will perform worse than the overall index (lowering the index value).
Let’s look at 2018
for example. The
following chart
analyzes the
year-over-year
change in the
month-end
closing price of
nine Sector ETFs
and the S&P500

Page | 13
Index itself. As you can see highlighted in green, three of the nine sectors are well ahead of the S&P500, while the other sectors lag
the index. Two sectors are negative (highlighted in red) and impose a significant drag on the S&P500.
Remember the Dogs of the Dow Strategy? The strategy with a simple formula to identify which companies within the Dow Jones are
likely to outperform the Index over the next year. What if a similar strategy exists with the S&P500? That is, is there a
mathematical formula to identify which sectors (not specific companies) of the S&P500 are most likely to exceed the returns of the
total index? The answer is yes…but we’ll get into that in a few chapters.
The key points to understand now include:
• If you invest in sectors which outperform the index, and do not invest in sectors which lag the index, your returns will
outperform the index returns.
• Investing in a specific sector, while less diversified than investing across the entire index, is far more diversified than investing
in a specific company. For example, investing in the Consumer Discretionary sector is an investment across 65 companies.
Why invest in Cash?
The simple answer; sometimes the market goes down. Actually, the market experiences a decline quite often. Between Jan 1, 2000
and October 31, 2018, the Year Over Year Change in the S&P500 was negative about 30% of the time. The Quarter Over Quarter
Change was negative more than 50% of the time.
When the price of the market indicates potentially severe declines, the optimal decision is to sell your equity investments and wait
for the price of the market to indicate growth. (I explain this in the When to Invest Chapter).
One more thing… “Cash” does not have to be the investment. The idea is to sell your equity investments and put the money into
some form of investment vehicle which can be sold very quickly. When it is time to buy back into the market, you will not have
much time to move money around; thus, cash or money market equivalents are very good options.

Page | 14
Why invest in Sector and S&P500 ETFs?
These ETFs are index-style investments. This means the ETF simply buys and holds the stocks in the specific sector (such as
Information Technology) or across the entire Index in the case of the S&P500 ETF. This is great because you know what securities
your fund holds, as well as enjoy returns matching those of the underlying sector or index. If the Information Technology sector
goes up 28%, your ETF (XLK) will go up 28% as well, less a small fee. Speaking of the fee, fees associated with ETFs are nearly
always less than fees associated with Mutual Funds or Actively Managed accounts. In this case, the XLK has a small fee of 15 basis
points ($0.15 per $100 invested).

Page | 15
________________________________________________________________________________________________________
HOW TO INVEST AND WHY YOU SHOULD IMPLEMENT THIS STRATEGY
________________________________________________________________________________________________________

Page | 16
When I ask “how?” I’m referring to the method you buy the identified ETFs. Let’s assume for a moment you just started a new job
and have a 401(k) valued at $60,000 with your previous employer. You decide to roll your 401(k) to an IRA so you can start
investing your retirement portfolio through the strategy you are learning in this book. How should you buy the identified ETFs?
Should you put your money “All In” and invest $60k in month one? Or should you Dollar Cost Average your investments into the
market over a period of time? (Investing $5,000 each month for twelve months as an example.)
The answer is, it depends.
Before I give you the full answer, let’s review another graph. The following chart indicates (in green) the months which each sector
outperformed the total return of the S&P500 Index over the next twelve-month period. For example, if you purchased the
Consumer Discretionary, Consumer Staples, and Information Technology sectors in Jan of 2015, your total return one year later
would be greater than the return of the S&P500. However, if you failed to purchase these sectors and invested only in the other
sectors, your total return one year later would be less than the return of the S&P500.

Page | 17
Just for fun, let’s assume is January 2015 and you want to invest your $60k IRA utilizing this Sector Strategy. Let’s also assume
you have this handy chart letting you know exactly which sectors will outperform the S&P500 over the twelve one-year periods
ending in 2016. The only information you are missing is which Sector and which twelve-month period will grow the most. How
would you invest your money?
As you do not know which sector will grow the most, or which twelve-month period will provide the largest return, the best option is
to dollar cost average your $60,000 across all twelve months while also investing evenly across each identified sector each month.
For example, in February 2015 you will invest $5,000 evenly across two sectors; $2,500 into each of the Consumer Staples and
Utilities sectors. In March 2015 you will invest $1,250 into each the Consumer Discretionary, Consumer Staples, Information
Technology and Utilities sector. At the end of the twelve-month period, you will have 100% of your assets spread across eight of the
nine sectors.
Now let’s assume it’s January 2016 and you receive the following chart in your email box. Wow! It’s your lucky day!! You just
received another year of perfect pics…you know exactly which sectors will outperform the market for the following twelve-month
period.

Page | 18
How do you invest?
You simply keep doing what you were doing before. When January 2016 rolls around, your investments in the Consumer
Discretionary, Consumer Staples and Information Technology sectors will have grown at a rate greater than the S&P500 over the
past year. To rebalance your “January Tranche” – simply sell these investments and re-invest evenly across the five identified
sectors in January 2016. When February arrives, sell your holdings of Consumer Staples and Utilities, and invest evenly across the
five identified sectors in February 2016.
I call this the “Sector Tranche Strategy.” Tranche is a French word meaning "slice" or "portion." “Tranche Investing” is the three-
step process consisting of:
1. Separating your investment portfolio into “tranches” - or separate portfolios (I recommend 12; one for each month)
2. Dollar Cost Averaging your portfolio investments over a period of time (I recommend 12 months)
3. Annually rebalancing each “tranche” as is own investment unit to the desired asset allocation
In other words, your equities portfolio will be split into twelve “slices” and each tranche will be managed as its own mini-portfolio.
The upside of this strategy allows you to take advantage of current market trends every month without paying Ordinary Income Tax
on your gains do to the sale of assets held less than one year. You are also able to concentrate a single tranche on a few sectors
while maintaining diversification throughout the entire portfolio: achieving the down-side protection of spreading your assets
across many sectors, while also achieving the up-side reward of concentrated investments.

Page | 19
________________________________________________________________________________________________________
WHEN TO INVEST AND WHY
________________________________________________________________________________________________________

Page | 20
Sell Hi – Buy Low
When it comes to timing the market, many investors attempt to predict the peak’s and low’s in real time as this would be the holy
grail of investment decision making. However, I’m unaware of anybody who has done this consistently over long periods of time,
and I suggest you be very skeptical of anybody who claims they can do this well. The result most investors experience is getting out
of the market too early; suffering through feelings of “I’m missing out” as the market continues to increase. The other result is
staying out too long after the market has bottomed-out; again, suffering through feelings of missing out as the market goes up.
That said, one key to beating the S&P500 is to avoid being invested in the market when it experiences the major declines associated
with recessions and depressions. The aim of this section is to help you make buy/sell decisions based on the US Equities market
being on the bottom side of the below matrix (decreasing prices / potential recession or depression), or on the top side (increasing
prices and actual growth).
The chart below outlines my Four Quadrants matrix. The idea is based on the value of the S&P500 and holds there are four basic
investment environments depending whether prices are rising or falling.

Page | 21
I will get into the “weeds” describing each Quadrant later, but for now, here is a quick overview of the strategy:
• Buy in Quads 1, 2 and 3
• Sell in Quad 4
Pretty simple eh? There are actually a few other things to consider, at what point you should hold or sell in Quad 4 for instance,
but this is the basic idea.
You should note Quads 1 and 3 (in most cases) have challenging transition phases, while Quads 2 and 4 are straight forward (in
most cases). Quad 2, with very few exceptions, will always transition to Quad 3 (rarely transitioning backwards to Quad 1). Quad 4
performs the same; nearly always transitioning to Quad 1, and rarely backwards to Quad 3.
But Quads 1 and 3 fluctuate forwards and backwards. Typically, they return to the previous Quad several times prior to moving
forward. These transitions between 1 and 4 can make investment activity frustrating, but there are very simple rules to follow for
each Quad in terms of buy-sell-hold decisions.
Let’s start with a look at Quad 4.

Page | 22
Quad 4: YoY and QoQ = Negative
This Quad represents 30% of the total market time between January 2000 and October 2018
• Rule 1: Maintain Sector Tranche Buy/Sell Strategy
• Rule 2: If the S&P500 declines by 16% from its one-year hi, sell all Equity ETFs and move to cash
This is a stressful time for most investors because your portfolio has been declining for several months. What I’m about to say will
likely shock you, but once you understand the reasoning you will be happy to change your view of Quad 4. When the S&P500 hits
Quad 4 you should be popping Champagne in celebration of what is about to happen! You should be excited beyond your wildest
dreams…. and here’s why.

Page | 23
Meet my friend John Smith. The year is 2007, John is 55 years old and plans to retire in about ten years. He’s been working for
the same company for the past 25 years and his 401(k) is the main source of his retirement savings; it is invested 100% in the
S&P500 fund. On October 31, 2007 he notices the S&P500 has been achieving all-time highs and his 401(k) balance is $1,000,000.
He’s on track to hit his target retirement number of $1.7m…he might even be able to retire a few years early. Life is great!
Eight short months later he hears all the news about the declining market. He checked the S&P to find it has dropped by 17%! He
rushed to check his 401(k) to see he lost $170,000 over the past eight months. He starts to panic! $170k is a lot of money! He
calls his friend who works as a Financial Advisor and asked what he should do. His friend says, “John, calm down. This happens
every four to seven years on average. You know this, you’ve seen it happen before. The market will definitely come back as it has
done every time over the past 100 years. I’m telling all my clients to be patient and know all their investments will return and
surpass the October 2007 highs in the near future. Just hold steady and everything will be okay.”
John trusts his friend and takes his advice. By March of 2009 John’s 401(k) declined to $483,000. Just over four years later in
April of 2013, John’s account was back up to $1,000,000. As of October 2018, his account is valued at $1,900,000. He suffered
through a ton of stress between 2009 and 2013, but John has hit his retirement goal and is ready to enjoy his golden years.
Now meet Tracie Jones. The year is 2007, Tracie is 55 years old and plans to retire in about ten years. She’s been with the same
company for the past 25 years and her 401(k) is the main source of her retirement; currently invested 100% in the S&P500 fund
and valued at $1,000,000. Tracie keeps pace with the market so she can take advantage of opportunity, which she sees in June of
2008. The S&P500 is down 17% and her account has declined by $170k. She starts to celebrate! Her friends think she is crazy!
She lost $170k and the market is crashing…what is wrong with this woman! But she knows this her chance to get ahead. She logs
into her 401(k) and moves everything to cash…then she waits patiently for a positive Quarter over Quarter change in price in the
S&P. This positive quarter finally happens month ending April 30, 2009. She logs back into her 401(k) and moves her $830,000
back into the S&P500 fund.
By December of 2009 (same year) her account was already over $1,000,000! By April of 2013, just four years later, her balance is
$1,254,000. Today, her balance is $2,330,000. Her closing balance at retirement is 22.6% higher than John’s, and she did not
suffer through the stress of losing more than 50% of her retirement savings nine years before retirement.

Page | 24
Overall, timing the market is a bad idea…and I just told you to time the market. Looking at John’s decision to “buy and hold,” he
suffered more than a 50% decline in his portfolio, which requires a 100% return to get back to even. Here’s a quick example.
Assume you buy one share of stock for $100. If the stock declines by 50% it is now worth $50. To break even, you will need to
double your $50 – thus, a 100% return is required.
Hindsight being 20/20, it would have been awesome to time the Great Recession perfectly… to sell everything in October 2007, then
move everything back into the market eighteen months later. Unfortunately, none of us have a crystal ball to identify the peaks and
lows. This strategy is less about maximizing profit than it is about minimizing loss.
One downside of the above example is Tracie missed out on the growth of the
Market between its bottom of 735 in March 2009 and 872 in May 2009 when
she bought back in; a considerable gain of nearly 19%. The upside is she
missed out on the decline from 1,280 to 872.81 (the point she re-entered the
market); an enormous decline of 32%. In this case, the buy-and-hold strategy
lost 158% more than the market-timing strategy.
One risk of applying this strategy is selling just before the market goes up and
missing out on the growth. In other words, you could potentially sell low and
buy high.
Here’s an example utilizing the same assumptions as before, but applied to late 2011:
• Assume you invested $10,000 in the S&P on May 1, 2011. The S&P was 1,363
• In Aug of 2011, the S&P closed at 1,218 – a 10.6% decline to May (Sell Sep 1)
• The next Positive Quarter over Quarter return occurs in Nov 2011 when the S&P 500 closed at 1,247 – which was up 2.3%
to Aug 2011’s close of 1,219 (three months prior – Buy Dec 1)

Page | 25
In this case, the strategy backfires. The S&P500 bottomed at 1,131 in
September and the strategy missed out on the gains between October 1 and
November 30; resulting in the market-timing strategy losing 31% more than the
buy-and-hold strategy.
When I compared the
buy-and-hold strategy
to the market-timing
strategy to the past
68+ years (Jan 1950 to Sep 2018), I found the optimal market-timing
strategy is to sell when the S&P500 declines by 16%. Across this time-
frame, if you sold your holdings prior to a decline of at least 16% (say
10% for instance) – then returned to the market after a positive Quarter
over Quarter return, the lifetime performance of your portfolio would lag the option of buy-and-hold by as much as 20% or more.
However, when selling at the 16% decline mark, then re-entering the market after a positive Quarter, the buy-and-hold theory lags
this strategy by 34%. A one-time investment of $10,000 made in Jan 1950 would have grown to $2,266,321 utilizing the market-
timing strategy; which is $574k greater than the buy-and-hold strategy.
Every year, without exception, some expert is touting the market is about to fall and you should sell. At the same time another
expert is touting strength in the market and recommending you buy or hold.
Sometimes they are right, other times they are wrong; but nobody is right every time! Utilizing the strategy I just walked through,
you are never trying to exit the market at the peak or enter the market when it is at its lowest. Instead, you are exiting after a long
period of growth, followed by a short period of decline. And you are entering after a short-to-mid period of decline followed by a
short period of growth. In doing so, you miss out on a short period of gains, but you also avoid the substantial losses associated
with recessions and depressions.

Page | 26
Quad 1: YoY = Negative. QoQ = Positive
This Quad represents 4% of the total market time between January 2000 and October 2018
• Rule 1: Buy when the S&P500 experiences transitions from Quad 4 to Quad 1…when QoQ change turns positive
• Rule 2: Once you buy, maintain a close eye for further recession: you will move back to cash if the QoQ growth becomes
negative
Looking at the graph, the vertical Blue Lines indicate Quad 1. This period indicates the end of substantial decline in the market
and the beginning of growth. Though it is short, it represents the largest short-term gains the market offers. As Quad 1 may move
backwards to Quad 4 prior to moving forward to Quad 2, you may find yourself going in and out of the market frequently, which
comes with the downside explained a few paragraphs back.

Page | 27
Quad 1 is the shortest, yet most lucrative
short-term growth period the S&P500 will
experience. However, by the time the
market has moved from Quad 4 to Quad 1,
the market has already experienced a large
gain. Here are a few examples:
In the first example, by the time the S&P500
transitions to Quad 1 at the End of April
2003, and you buy on May 1, the market
had grown by 9% over the previous 60 days.
In the second example, by the time the
market moved into Quad 1 at the end of
April 2009 and you buy on May 1, the
S&P500 had grown by 9.4% over the previous 30 days. Over these two six-month periods, the S&P500 grew by a total of 17.7% and
27.9% respectively.
In this case, as all your investable assets are currently in Cash and Quad 1 offers the most explosive short-term growth the market
experiences, you do not want to dollar cost average into the market as we did in the previous example. We want to have all our
available money in the market to be sure we are part of the gains.
This provides a new challenge. If you move all your cash into only a few sectors, your portfolio will likely have too much risk and be
too concentrated. If you pick the wrong sectors, this could have very bad effects on your returns.
The resulting best option is to invest 100% of your cash into the S&P500 ETF. This option allows you to maximize your investment
without concentrating too much on a single sector. Once you’ve held this fund for more than a year, you then revert to the Sector
Tranche Strategy by diversifying your investments across identified sectors over a twelve-month period.

Page | 28
Like most other things in life, never say never, and never say always. I can certainly envision a scenario where it would make sense
to invest at least a portion of your investments into a sector or two while moving the majority into the S&P500…we’ll discuss how to
pick sectors in the next chapter.
Quad 2: YoY & QoQ = Positive
Quad 3: YoY Positive - QoQ Negative
These Quads represent 45% and 21% respectfully of the total market time between January 2000 and October 2018
• Rule 1: Buy
• Rule 2: Buy
Looking at the graph, the vertical Orange Lines indicate Quad 2, and Gray indicate Quad 3.
These periods are long and represent a combined 66% of the previous 19 years; which is great because Quads 2 and 3 represent a
time of YoY growth in the S&P500.

Page | 29
Quad 2 is our favorite Quad. In this case, the YoY and QoQ price changes are positive; meaning the market is on a continuous
upward trend.
Quad 3 is not bad, but the QoQ turn to negative indicates Quad 4 is approaching. Quad 3 nearly always reverts to Quad 2 prior to
transitioning to Quad 4 – but in either case, the only decision during this time frame is to buy and enjoy the upside.
Overall, applying this buy/sell strategy to your portfolio will lead to (1) buying low, (2) selling hi and (3) returns which outperform
the S&P500 over the long term.

Page | 30
________________________________________________________________________________________________________
PULLING IT ALL TOGETHER
________________________________________________________________________________________________________

Page | 31
The next question to answer is this: How do you identify which sector(s) is
(are) most likely to outpace the growth of the S&P500 index? The easy
answer: my picks are posted and easily found every month on the
website…free for anybody who wants to take advantage.
Here’s the more difficult answer…statistically identify periods a sector is
likely to outperform the index. For a full explanation of the statistical model
used to identify the by-month sector pics, please read the Appendix.
In all, the model identified 409 Sector Buys over the 214-month period; 311
of these periods (76%) resulted in twelve-month periods which outpaced the
growth of the S&P500. Total buys and accuracy details are provided here.
A $1.2m investment on Jan 1,
2000 would have grown to
$2.3m invested in the SPY.
The same investment in the
Sector Tranche Strategy
would have grown to $5.9m.
A complete list of Sector
Selections by month over the
full-time frame of the model is
available on the website.

Page | 32
________________________________________________________________________________________________________
INVESTING YOUR 401(k)
________________________________________________________________________________________________________

Page | 33
First things first, you should always maximize your 401(k) investments prior to investing outside of your 401(k) because the tax
advantages are so powerful. Here’s the quick math: If you invest $18,500 in your 401(k) and make a return of 0% over the next
year, you will have $18,500 in your account at the end of year 1. (remember, these dollars are invested BEFORE taxes)
If you receive $18,500 in pre-tax investment dollars, then pay 25% taxes on this income, you have $13,875 to invest. If you make a
33.33% return on this investment over the next year, you will have $18,500 in your account at the end of year 1.
In other words, if you have less than $18,500 to invest per year, and you choose to invest in something other than your 401(k) – you
must expect a 33.33% return just to break even to a 0% return in your 401(k) – assuming you are at the 25% tax bracket. If you
can achieve such returns over the long run, you will likely be the richest person on the planet.
It is clear you should utilize your company sponsored 401(k) plan, but how should you manage the investments? Unfortunately,
I’m not familiar with any 401(k) plan which allows for concentrated investments in the sectors of the S&P500. However, you can
still apply the Four Quadrant Buy/Sell strategy within your 401(k). Here are the steps…
Step 1: Review your Investment Options. You likely have the option of investing in the S&P500 through a low-cost ETF in your
plan. If so, allocate 100% of your investments to this option. If you do not have this option, it is difficult to give you specific advice
without knowing what options are available to you. That said, a likely good alternative would be a Target Date Fund. Identify the
Target Date Fund whose date is furthest from today and allocate 100% of your investments to this option.
Step 2: when the market declines by 16% from its most recent twelve-month peak – allocate 100% of your investments to the
money market option. Every 401(k) plan I’ve seen has this option.
Step 3: follow the Buy/Sell rules for Quads 1, 2, 3 and 4. I post these on my website as well…or you can easily do the math
yourself.
In doing this, your 401(k) will grow at the same pace of the market while you are invested – but will decline less when the market
experiences a recession or depression. One caution; your 401(k) provider will allow a certain amount of investment changes per
year without charging you a penalty. You should identify the trading policy prior to moving in and out of the market – as this move
may come at a penalty from the provider.

Page | 34
________________________________________________________________________________________________________
ABOUT THE AUTHOR
________________________________________________________________________________________________________

Page | 35
A little about me……
OK, here’s me in 45 seconds. I’m originally from Bethany, a small suburb of Oklahoma City. I completed both my undergrad in
Marketing and MBA focused on Finance and Economics at the University of Central Oklahoma. After University, I spent nearly 20
years in sales, marketing and brand management roles within the Wine & Spirits industry.
I loved my career in the Wine Business, but I traveled as much as 200 days a year, and I wanted to find a way to spend more time
at home with my wife and two children. So, I decided to move to the financial industry in 2014. It seemed like a logical move: (1) I
had the educational background and (2) I’ve always loved working with numbers. I spent a few years as a Financial Advisor, then
moved to a Private Equity firm, and today I work as a Financial Analyst in the tech industry.
A little more about me….
… I want to tell you about one of the worst investment decisions I have ever made. The financial impact on my retirement was
devasting, but the lessons learned were, well… priceless.
This story begins a few years ago in 2012 when, at age 38, I left my job for a better opportunity for the third time in my career. This
new opportunity came with a big raise and the opportunity to move home. I was very excited.
For me, the biggest difference in this transition compared with career changes when I was in my twenties was the size of my 401(k)
investments. I was a diligent investor for more than a decade and my 401(k) had grown to over three years of income.
As I was starting a new job, I had multiple investment options with my 401(k):
1. Leave it with my previous employer
2. Roll it to my new employer’s plan
3. Roll it a Traditional or Roth IRA
4. Cash it Out

Page | 36
First, the worst thing I could have done was cash it out. This would have caused a 10% penalty for being too young to make a
withdrawal, plus pay Ordinary Income Tax (not Capital Gains Tax) on the full amount. I did not give this option any consideration.
I chose option three – Roll it to a Traditional IRA. Why? The main reason is I didn’t like being limited to the twenty or thirty mutual
fund options offered by most 401(k) plans. After moving my investments to the IRA, I could invest in nearly anything with very few
limitations.
HERE’S THE BUT…
But like many individual investors, I didn’t know what I was getting myself into. Proper investing takes training and
discipline…which I thought I had. I have a MBA in Finance. I obsessively read about and study the financial markets. I was
confident (over confident) I would be able to obtain great returns!
After two years of doing it myself, I lost 10% of my portfolio. Doesn’t sound like a huge loss, right? Well, the market climbed more
than 30% over this same time frame. Using $200,000 as an example, this amount reduced to $180k vs growing to around $260k.
This makes 10% sound much worse!
I must admit I did nearly everything wrong. I had become a menace to my own portfolio. My retirement options were shrinking,
and I was frustrated on multiple levels. At this point, I had no one to blame but myself – the failure was mine. If I was going to
protect my retirement savings and grow my nest-egg to the wealth I desired, I had to make significant changes.
SO, HERE’S WHAT I DID
My investment goals boiled down to two main objectives: (1) minimize loss when the market goes down and (2) grow more than the
market when the market goes up.
Determined to figure this out, I made a huge change. After a nineteen-year career in Sales and Marketing in the Consumer Goods
Industry, I took a career leap to the Financial Industry as a Financial Advisor with Merrill Lynch. A few years later I expanded my
horizons and became a Financial Analyst; first with a Private Equity company, and now in the tech industry.

Page | 37
As a financial analyst, I assess opportunities and provide guidance on investment decisions. This role allows me the opportunity to
earn a living doing something I’m passionate about; building financial models. (what a sicko! What kind of person loves
spreadsheets!?!)
A BETTER WAY TO INVEST
Having spent 90+ hours per week studying investment strategies and building financial models for nearly half a decade, I’ve become
pretty good it. A few years ago, I began testing hypothetical investment strategies against actual historical data, and in doing so, I
developed a strategy which has a 10-year average return of 17%.
Long-term returns of this nature are only offered by the best investment managers in the world; guys like Warren Buffet and Ray
Dalio. Buffet has a business degree from Wharton and Dalio’s is from Harvard. They are both billionaires and have a history of
market-beating investment success. I don’t have that pedigree. My MBA is from a widely unknown University and my financial
journey has been a wreck. I’ve made poor decision after poor decision and this is my story of how I got out of there; how I learned
from my mistakes.
As I mentioned in the introduction, I’m sure you are skeptical…though I hope less skeptical after reading this short book. If you are
ready to test the waters, I look forward to growing our wealth together!
I’ve learned enough over the past decade to understand I will never know it all and I have a lot more to learn. But I also learned a
few imperative rules and processes which would have saved me years of sleepless nights if I had only known these tidbits earlier in
life.
“Hey, I don't have all the answers. In life, to be honest, I failed as much as I have succeeded. But I love my wife. I love my life. And I
wish you my kind of success.”
- Dicky Fox (Jerry Maguire)

Page | 38
________________________________________________________________________________________________________
APPENDIX
________________________________________________________________________________________________________

Page | 39
The next question to answer is this: How do you identify which sector(s) is (are) most likely to outpace the growth of the S&P500
index? The easy answer: my picks are posted and easily found every month on the website…free for anybody who wants to take
advantage.
Here’s the more difficult answer…statistically identify periods a sector is likely to outperform the index. (This is the boring part. If
you do not like spreadsheets and/or statistics, you may want to skip this section)
To explain the strategy, I will use the Consumer Discretionary data set to walk through the steps.
Step 1: I downloaded the historical, month-end closing prices of the Consumer Discretionary ETF (ticker XLY) from Yahoo Finance.
The data set begins in January 1999 and ends October 31, 2018; for a total of 238 monthly observations, 226 (238-12) year-over-
year observations, and 214 (226-12) observations with perfect information. The “Perfect Information” period runs from January
2000 to October 2017 and is considered perfect because (as of October 2018) we know with mathematical certainty whether the
sector outperformed the S&P500.
Step 2: I downloaded the historical, month-end closing prices of the S&P500 (ticker GSPC) over the same time frame.
Step 3: I calculated the following statistics for each data set:
• Year over Year Change in price
• Quarter over Quarter Change in price
• Spread (the YoY Change less the QoQ change)
Step 4: from these statistics, I made the following monthly observations on each data set:
• Is the YoY Change Negative or Positive
• Is the QoQ Change Negative or Positive
• Is the Spread Negative or Positive
• Is the Sector Spread greater than or less than the S&P500 Spread

Page | 40
Step 5: from these observations, I ran 208 monthly “If / And” scenarios. I will not list them all…but here are a few examples so you
can get the idea:
• If the Sector’s YoY change in price is negative and the S&P500 change in price is positive
• If the Sector’s YoY change in price is positive and the S&P500 change in price is positive
• If the Sector’s spread is positive and the S&P500’s spread is negative
Step 6: Test each “If/And” scenario against the S&P500. Here are a few examples of the 214 months between Jan 2000 and Oct
2017:
• The XLY experienced a negative YoY price change 61 months. It outperformed the growth of the S&P500 over the next twelve-
month period 88.5% of the months it experienced this price change.
• The XLY exhibited a negative spread (YoY Growth less QoQ Growth) 62 months. This sector outperformed the growth of the
S&P500 over the next twelve-month period 85.5% of the months it experienced this spread.
• The XLY was in “Quad 3” 14 months. Over these months, it lagged the performance of the S&P500 nearly 65% of the time.
Looking at these results, I feel very comfortable investing in this sector ETF in months where the Year over Year price change is
negative. I also feel comfortable investing in months when the Quarter over Quarter growth is outpacing the Year over Year change
in price. However, when the QoQ turns negative and the YoY change is still positive, I will avoid investing in this sector.
Overall, the Consumer Discretionary ETF (XLY) experienced the following between Jan 2000 and Oct 2017:
• 164 Positive twelve-month periods
• 121 of these periods outpaced the S&P500
• 81 buy periods were identified through the statistical analysis
• This number was reduced to 46 buy periods after considering moves to Cash in Quad 4 and twelve-month S&P500 investments
when moving to Quad 1
• Of the 46 identified buy periods, 41 of the periods outpaced the S&P500 while 5 periods lagged the index: winning 89% of the
time

Page | 41
In all, the model identified 409 Sector Buys over the 214-month period; 311
of these periods (76%) resulted in twelve-month periods which outpaced the
growth of the S&P500. Total buys and accuracy details are provided here.
A $1.2m investment on Jan 1, 2000 dollar cost averaged across the entire
year would have grown to $2.3m invested in the SPY.
The same investment in the Sector Tranche Strategy would have grown
to $5.9m.
A complete list of Sector Selections
by month over the full-time frame
of the model is available on the
website.

Page | 42
DISCLAIMER
The scenarios presented are for illustration purposes only and intended to demonstrate the capabilities of www.ibeatthestreet.com. They are not
intended to serve as investment advice because the effectiveness of any strategy is dependent upon your individual circumstances. Results will
vary, and no suggestion is made about how any specific solution or strategy performed. The discussions herein are general in nature and are
provided for information purposes only. There is no guarantee as to its accuracy or completeness. Any information presented about tax
considerations is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither
www.ibeatthestreet.com or any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or
tax advisors before making any financial decisions.
You will find strategies for your family, insights on current research, as well as personal stories to illustrate how proper financial preparation can
change your life for the better. Use this information to empower your financial choices.

Beat the S&P 500 and Top Funds with a Simple Strategy

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Similar a Beat the S&P 500 and Top Funds with a Simple Strategy

Similar a Beat the S&P 500 and Top Funds with a Simple Strategy (20)

Último

Último (20)

Beat the S&P 500 and Top Funds with a Simple Strategy