American Century Ultra Fund: The Folly of Not Following Your Trading Plan

Forbes Magazine recently wrote about the problems of the American Century Ultra Fund, and how this mutual fund's problems were caused by not following their plan.

The fund's trading plan was to pay any price for growth. This strategy can work but you have to accept the volatility. Growth funds that do an 'A+' job in bull markets will usually get an 'F' in bear markets.

Sure enough, during the 1990's, American Century Ultra was one of the hottest funds. Then, when the bear market hit, the fund lost money - as did all the other growth funds.

Unlike the other growth funds, however, Ultra's fund managers panicked, sold their holdings, and went conservative.

As a result, during the 2002-2007 bull market, American Century Ultra lagged all the other growth funds.

The Ultra fund's investors not only lost money in the bear market, but they failed to make it up in the next bull market. Investors bailed out, and Ultra's assets shrunk from $40 billion to $10 billion.

Forbes listed a few of their specific trades, including:

Buying Network Appliance at 38 and selling at 29.

Selling Amazon.com before it tripled.

I get excited when I hear examples like these, because they perfectly showcase the beauty of my simple trading system. Once I introduce a stock into my portfolio, my system takes over its management, and automatically self-corrects it to get in line with the market.

If, for example, I bought Network Appliance at 38, and it dropped to 29, my system would give me a specific amount to buy. This amount would be scaled to the magnitude of the change, so I will still have money in case the position declines further.

All trading systems break down if the investor panics. If you use an approach like mine, which spits out simple buy and sell orders automatically, it is much easier to stay calm.