I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Tuesday Book Club, I share an idea from a book.
Stock markets around the world are wobbly today, as Trump is putting the screws to Europe over his desire to acquire Greenland. U.S. stock futures are down as I write this (DJIA F -1.22%, S&P F -1.36%, NASDAQ F -1.68%). The Euro Stoxx 600 is down -1.32% and all Asian markets are in the red. Meanwhile precious metals continue to soar, government bond yields are up, and the oil price is up.
Is this risk-off move suggestive that a larger correction is on the way? A pullback or even the start of a bear market?
There’s no way to know. But if you find yourself feeling worried, you might want to consider whether you shold be using some market timing rules instead of simply buying and holding.
The idea of buy-and-hold investing has a grip on the average individual investor’s psyche, but it’s not the only way or even the best way to manage your investments. There are a variety of timing rules you can use instead to get in and out of positions to limit your losses during market corrections and bear markets.
But you might say, “why would I do that? Time in the market is more important than timing the market.”
Investment advisor Lance Roberts identifies that as one of the five main myths of investing:
5) You Can’t Time The Market – Just Buy And Hold
There are no great investors of our time that “buy and hold” investments. Even the great Warren Buffett occasionally sells investments. Real investors buy when they see value, and sell when value no longer exists.
While there are many sophisticated methods of handling risk within a portfolio, even using a basic method of price analysis, such as a moving average crossover, can be a valuable tool over the long term holding periods. Will such a method ALWAYS be right? Absolutely not. However, will such a method keep you from losing large amounts of capital? Absolutely.
From his book Asset Revesting, investment advisor Chris Vermuelen writes that you don’t have to fear losses, if you use rules that tell you when to exit positions:
Asset revesters take losses in stride. No one likes to lose, but losing is a fact of life for investors. The key is to limit your losses and maximize your successes. A losing trade is not a failure. It isn’t a reflection of you or of your overall skill. After all, if it was possible to be right every time, we’d all be rich…. The onlly way a losing trade is truly a failure is if you aren’t willing to take the loss without hesitation and move on to find a different asset rising in value. By accepting that you’ve made a losing trade and getting out of the position, you can focus on making money—not on being right all the time. Many traders feel they don’t want to lose money on any trade, and they stay in positions in the hopes that it will recover to at least the break-even point. If you aren’t willing to take small losses or don’t have the discipline to take losses, you should not be trading.
I use a set of rules that tell me when to get in and out of positions in my non-retirement and Roth IRA. I have my traditional IRA managed by someone else, but I may not stick with that if we enter a prolonged bear market where I see ongoing losses. Capital preservation is important. Since we’ve been in such a long secular bull market for U.S. large caps since the Great Financial Crisis, most people focus only on staying invested. But it’s important to focus on not losing too much too, especially with equity valuations so high.
These rules get me into and out of positions on a monthly basis based on positions reaching new 12-month highs and crossing above or below the 200-day moving average. They worked to get me out of Bitcoin last year with a nice gain. And they worked to push me to add more and more gold throughout the year.
Most important, they give me a systematic way to respond to stock market ups and downs. No longer do my emotions rule my investing decisions.
Am I selling today? Why yes I am, because it happens to be the monthly buy/sell day for my Roth IRA. Because sell rules were already triggered for a set of positions, I am selling those positions regardless of what happens when the market opens today. I will be selling them lower than I expected but the key is that I am getting out of positions whose charts have deteriorated.