Saturday, June 5, 2021

How To Avoid Stock Market Sleepless Nights

I had a correspondence with a noted economic advisor which I detail below;

QThe issue in share investing is your appetite for risk. But whichever one chooses — and I go for “far less volatility (and sleepless nights)” — the end result is the same.

Buy and hold or, if it suits you, get out when the 200-day moving average dips. The 200-day chart seems as infallible as such things can be.

AFor readers wondering what on earth you are talking about, everyone who invests in shares — whether directly or via a share fund or a higher-risk or other fund that holds lots of shares — has two choices around trading:

  • Buy and hold. You leave your money where it is, regardless of what the markets are doing. This should be ten-year-plus money, and you can be pretty confident the markets will have time to recover from any downturns by the time you want to spend.
  • Get in and out of the markets, hoping to avoid the downturns and be in for the upturns. This might mean cashing up or moving your money to a lower-risk fund, and returning when things look better.

I always choose buying and holding. It’s easier, and research shows that in the long run it works best.

However, people are always coming up with ways to try to predict market ups and downs, so they can win by timing their entries and exits. Our correspondent has found a system he likes, and sent me an article about it by Brett Arends on Some excerpts:

“Money manager Meb Faber worked out years ago that pretty much every stock market crash or bear market in history has been signaled in advance.

“If you just cashed out when the market index first fell below its 200-day moving average, you avoided nearly all the carnage. (OK, in the sudden 1987 one-day crash you got all of a single day’s notice.)

“Even if you didn’t end up making more money in the long term than a buy-and-hold investor, he found, you made pretty much the same amount … and with far less ‘volatility’ (and sleepless nights).”

Arends continued, “Last year this trigger got you out of the S&P 500 (the main US share index) on March 2, just before the main implosion. The market rose above the 200-day moving average again, triggering it was time to get back in, on June 1.”

I looked back at those dates. The strategy meant you skipped nearly three quarters of the Covid plunge. You sold when the index had fallen to 3,090, missed the bigger drop to 2,237, and came back in at 3,056.

That’s tidy. But it doesn’t actually gain you anything — especially after you take any trading costs into account, as well as the bother of watching the 200-day chart. It would have been much more impressive if you had re-entered the market near its trough.

And what about the 1987 exception — one of the biggest share crashes?

The thing is that Arends, and our correspondent, seem to think the alternative to timing the markets is tossing and turning through downturns. But buying and holding doesn’t have to mean sleepless nights. It can mean ignoring the markets, and reading novels instead.

Sure, you can’t escape the talk during a big downturn. But I just look up from my book and say, “Here we go again. I’ll just sit tight and it will come right.” And it always done."

In further correspondence following publication I added;

I was delighted to read your analysis of how the example of selling and buying I provided actually worked out. This confirmed that both methods work and bring peace of mind with the difference shown that your book reading method would gain you a bit higher returns than my method. It also shows that personality types will still do their own thing regardless of a slight disadvantage-I actually enjoy following the S&P500 moving average index, it's not a chore, rather it adds a soupcon of smugness :-) (when it works out of course)

As you have pointed out before we humans are odd-my ​stocks​ went up $1k this week which I appreciated but didn't rejoice over, after all, how much can $1k make to ones life in sum-but when it goes down, even $500, the "unenjoyment" is palpable!


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