Do you time the market? By what percentage do you vary cash positions?
This is a red flag question. Market timing is the Broken Clock Approach—it's always right twice a day. If you are investing in stock funds and want an equity rate of return, avoid funds that time the market.
Are there any technical characteristics that you examine?
Most studies indicate that most technical approaches are not that successful, and few portfolio managers place very much emphasis on technical analysis. There is one type of technical analysis that has shown promise, though, and that is relative strength, in which the price performance of a stock is measured relative to the price performance of an index, indicating whether the stock's price is trending up faster than other stocks.
An interesting use of this tool is described by a growth fund manager as follows:
"We use it not because we feel it's some kind of magical technical tool that tells us if the stock is a good investment, but rather as a check on reality. If a particular company looks very good to us but is underpeforming the market, I want to step back and say 'What am I missing?' There must be something wrong that other investors know about that I, for whatever reason, haven't been able to find or don't understand. If the relative strength isn't there, we may simply keep our eye on it rather than buy it."
Continue to Step 5 »
