Our most aggressive core strategy, Fund Upgrading is a “momentum” strategy premised on the idea that recent past performance tends to persist. The strategy has you diversify your portfolio across five stock fund “risk categories” and up to four bond fund categories. You then buy the funds SMI objectively determines to have the highest momentum, occasionally replacing lagging funds with those showing stronger momentum. With only monthly maintenance, Fund Upgrading has generated considerably better long-term returns than the overall market. This article explains the changes to put in place for the coming month.

In the Small/Value group, Fidelity Small Cap Discovery (FSCRX, 4/2012) is being replaced.
This month we're replacing our longest-held recommendation, just a couple months shy of two years after it was first added to our recommended funds list. Not surprisingly, when a fund stays in our Upgrading portfolio that long, it reflects a strong level of performance. This fund is no exception, having gained 51.5% for us through the first 21 months we owned it. This compares quite favorably with the 39.9% gain of the average fund in SMI's small/value group! However, as we've noted before, every fund eventually falls out of favor and needs to be replaced. One of Upgrading's greatest strengths is its selling discipline which keeps us from holding on too long once a fund's momentum has stalled.

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