Gerham Financial Confidence
In the years that I have been managing 401Ks, the average client had no clue how to select the appropriate mutual funds from the menu of funds available.
Having a non-biased selection from the data provided by the Matrix, provides a great relief to my clients! It is not anyone's opinion, rather a scientific calculation! Check out the background of firms and professionals in your area as well as my background at http://brokercheck.finra.org
What is PnF?
What moves stocks and mutual funds is supply vs. demand (buying vs. selling). The allocations and changes that are plotted on the PnF charts are not based on one's opinion, but rather on a measure of price trend that indicates how a stock is performing relative to other stocks in its industry - also known as Relative Strength (RS).
It is nothing more than Economics 101.
When it's all said and done, if there are more buyers wanting to buy than sellers willing to sell, the price will move higher. If there are more sellers than buyers, the price will move lower. Therefore, recording the price action of a security can yield important information as to who is winning the battle for that security - supply or demand.
Who developed PNF?
The Point & Figure methodology has been around for over 100 years. One of the first proponents was Charles Dow, the first editor of the Wall Street Journal. Charles Dow was a fundamentalist at heart, yet he understood the importance of the supply and demand relationship in any stock. The Point & Figure methodology is just a logical, organized way of recording this simple Economics concept known as supply and demand.
How does PnF work?
- A reading of 30% or lower is considered the “green zone” – low risk territory
- A reading of 70% or higher is considered the “red zone” – high risk territory.
- Below 30% - approximately every 3-4 years
- Measure of participation in the market and thus risk in the market.
- A one stock = one vote indicator
- Does not measure where the major indices should go.
- Does not tell us the magnitude of movement
- Does not tell us how long we will be on offense or defense.
Fund Matrix example for a Local 401k.
(Green is Good), Red is Bad
This is my major tool in 401k Management.
High RS scores are put together in a matrix, with each fund's PnF chart, being compared to every other fund available within your plan. So a plan with 20 fund choices will require 380 (N squared minus N) charts to be analyzed! That's why we need a computer! The funds in green have more "wins" relative to the other funds in your plan. Thus, green is good!