The particular approach that I've developed would have made 27.5 per cent compound a year since 1984. And it doesn’t involve any voodoo methodology whatsoever - it's all based on a proven, fundamental valuation technique.
The strategy involves investing in the FTSE 100 index using spread bets, based on the signals generated by the ShareMaestro programme, which I developed. ShareMaestro values the FTSE based on the outlook for dividends and inflation, as well as on gilt yields and a risk premium. Because this strategy uses spread bets, it exaggerates the gains - but also the losses - that the index makes. Best of all, all the profits achieved are free of tax.
So, how exactly does it work? The first step is to put your trading funds into an instant-access savings account and open a spread betting account. When a buy signal occurs, you put one-quarter of your trading funds into a FTSE 100 'futures' spread bet, with gearing of seven times and at least two months until expiry. You then set a stop-loss equivalent to 25 per cent of the total value of your trading funds.
A buy-signal within this strategy is when the ShareMaestro valuation of the FTSE 100 goes above 105 per cent of its intrinsic value, while a sell-signal is when the valuation crosses below that level. Having opened a long position, you hold your position for two months unless the stop-loss is triggered.
If the bet reaches its expiry date, and the valuation is still above 105 per cent, you open a fresh futures bet. Alternatively, if the valuation drops below 105 per cent at any point after the initial two-month period, you sell the bet immediately and don't re-enter until another buy-signal occurs and the current spread bet contract has expired. The same goes for if your stop-loss is hit. Whenever you are out of the market, all your cash should be on deposit at the highest instant-access rate available.
FTSE fortunes for the brave
One further rule concerns when the market goes into freefall, which is a time you need to run for shelter. My definition of freefall is when the FTSE 100’s closing price crashes by more than 10 per cent below the price at which the 145-day moving average has fallen below the 242-day moving average. This is a rare event, which has only happened twice in the last 29 years.
The historic returns from this strategy have been impressive. Had you started out with £1,000 at the FTSE's birth in 1984 and entered all of the 47 trades since then, you’d have been sitting on £1,150,000 by the end of 2012. Yes, you read that right. Be under no misapprehension, though. While this is a scientific approach, it is also a risky one. As with any systematic strategy, it would have required discipline and patience.
The gearing of 7 times is a key source of the returns generated, but also of the risks. All that it takes for you to lose 25 per cent of your total investment is for the contract price to move 3.57 per cent below the price at which you bought. On three occasions during the 1984-2012 period, this 25 per cent stop was triggered twice in a row. If you’re uncomfortable with the risks, you can reduce the gearing, but this will also lower the profits available.
If you'd like to read how this spread-betting strategy works in detail, you can download the full strategy and track record at www.sharemaestro.co.uk.
