One reader asked the percentage that Monday's trade raised in cash. Another reader answered for me that just about all such trades tend to be a couple of percent or so which was the case with this one. One thing to remember is that bear markets start slowly over several months giving plenty of time to get out. We choose a breach of the 200 DMA as a starting point because it is simple to track and easy to explain to clients, oh and we have a reasonable basis to believe it is effective for our objective of trying to avoid the full brunt of large declines.
One reader asked about getting whipsawed by the 200 DMA. The answer here depends on your definition of whipsaw. For example if we sold one position with a low single digit weighting, as we did on Monday, and the market were to start a six week 20% rally to close out the year then the drag from the sale would be negligible. Obviously a more aggressive selling of stock as some do would meet more people's definition of whipsaw. I don't think whipsaw pertains in the case of a small trade but you may view it differently.
Another question was on how we decide what to lighten up on and if there is anything we would buy. It is different every time. Often we are looking to remove volatility but this time removed a holding that had not been doing very well. In an instance where removing volatility is a focus then you would expect that we would reduce exposure to a sector that is typically more volatile than most of the others. For investors who just use broad asset class funds then it would make sense to consider taking defense from their small cap exposure--for investors who believe in defensive action based on whatever criteria they deem suitable.
We would consider buying market neutral funds and inverse funds and did so during the last bear market.
I want to repeat something from above;
bear markets start slowly over several months giving plenty of time to get out
The best thing would be for you to look at charts from past bear markets and see for yourself how this has worked before. This is a normal market behavior which has repeated many times and so I believe in the idea going forward.
10 comments:
During most of my investing life I have always increased my holdings on big dips in the market. Since about 5 years ago, I now apply strategic thinking AND selling of securities when I think appropriate.
I appreciate your comments as I continue to develop my strategy.
Mark Hulbert has an interesting take today on the 200 DMA. He said it hasn't worked in the last 2 decades because now everyone is using it.
http://www.marketwatch.com/story/meaning-of-200-day-averages-violation-2012-11-14
Each situation is different. I have a very low withdrawal rate of about .7% and I am investing for my heirs. I buy when stocks are cheap. I don't sell equities and hand money over to the government needlessly in the form of capital gains taxes. I also don't plan to let the government tax my estate through the use of various estate planning techniques.
I was called stupid by a commenter last week for doing this. As Forrest Gump says, "stupid is as stupid does."
8:05,
I would say it worked when it mattered most; 2000 and 2007.
8:15
If you have money to buy when stocks are cheap you have cash that you had raised by selling before, hence had capital gains or losses, or are getting substantial amounts of new money. If you stayed fully invested over the last 12 years it would have been hard to generate good returns in stocks.Even Buffet had marginal returns over this span.
Perhaps the next investment cycle, coming soon,is going to measure astute financial prowess not by be beating any benchmark, but through finding the best tax shelters to avoid having your wealth extracted by Big Government via death by a thousand taxes.
T
12:15,
My portfolio generates lots of cash from dividends and interest. I am not sure why you think it must come from sales of assets.
I dunno, the equities I bought in 2008 and 2009 have done all right by any measure.
Equities owned for decades seemed to have done ok too.
As I said, my time horizon might be different than many.
Roger - I know you don't know for sure (no one does), but do you think this is the start of a bear market? By "think," I mean a greater than 50% chance.
Your question and concession that no one does know is why i pick a strategy that is very simple and objective. This would be an earlier start to the next bear market than I have been expecting.
On CNBC a couple of weeks ago I talked about a decline for a while here not necessarily a bear market--we'll see if that holds up or if this is a bear market.
I agree on a decline, not a bear market though. I think 1300 is the first test, then 1250ish the next. Given the data now, I'd consider increasing equity exposure at those levels.
Buy when others are fearful.
Thanks for the response.
Post a Comment