A couple of comments came in about the utility of the 200 DMA as a trigger point for defensive action. There was a question about how much research I've done and a mention (though no link) of a study that concluded it did not work in the 1990s. So a few things here to go over.I wrote a post (you can look for it if you are so inclined) comparing it to straight buy and hold from the early 1980's forward is it was better than buy and hold by a noticeable amount. As far as how much research, there is no way to answer that. First of all I am not a white-paper guy. If I could quantify how much, some would think that was sufficient and others not (some folks always want more data no matter how much they already have).
The intended focus is not "hey use the thing I use" it is "hey you might want to use something." The something you might want to use should make sense to you based on whatever it is that matters to you. I've never claimed the 200 DMA was perfect but it is simple. Look at it over whatever time period that makes sense to you and decide for yourself. then look at other concepts in the same light and see if any of it makes sense. For me it does.
As far as it not working during the 1990s I guess it depends on what "not working" means. It has fake outs every so often, it did earlier in this decade and it did during the 1990s too. There were several instances where it got people out and then back in a little later at about the same level, in those instances it smoothed out the ride but did not add any financial value.
My goal from the beginning with this is simply to go down less when the market goes down a lot. Your goal might be different. Avoiding a chunk of down a lot potentially does a couple of things. One it can smooth out the ride and it can add to the overall return during the entire stock market cycle, at least that is my hope. You can look for yourself at the charts and make your own decision.
One housekeeping item, I appreciate all the comments left on the blog. This is going to be a crazy week and so I might not be able to answer as much as normal.
A totally unrelated note; I put 3/4 of a tank of gas into our Toyota 4-runner and it only cost $16.45. Woo-hoo!
14 comments:
Plenty of money left for lottery tickets!
Here's a discussion from Merriman about 4 different market timing models with results from 1972 to 2005.
A totally unrelated note; I put 3/4 of a tank of gas into our Toyota 4-runner and it only cost $16.45. Woo-hoo!
Darn commodity speculator!
:-)
Here's a positive recent result for the 50/200-day crossover method:
http://marketsci.wordpress.com/2008/09/21/moving-average-crossovers-debunked/
As you know, I'm not a believer of the 200 day SMA theory. I have crunched the numbers and it does not outperform. Although it does take a healthy chunk of risk out of the equation.
But I would like to throw this out there as an honest question. This time, we had a fairly nice break through the 200 day SMA. However, if you look historically, there can be a number of whipsaws back and forth at that level. Is it physically possible to manage several portfolios, large or small, as things whip up and down across this line?
How would you handle it if the line was crossed 5 or 6 lines before any further direction was established?
BillB, there are fakeouts that go with the territory, this happened quite a few times earlier in the cycle.
It is the possibility of fakeout that I only tweak into defensive posture with one or two trades. I've never been a fan of being to aggressive and frnakly the notion of bear markets starting slowly, as this one did means there is no need to rush out. I typically wait for a close below for the second day in a row before doing anything.
Roger, would you indulge a question to the posters?
The majority seem dismissive of the 200 dma as a timing signal. Could I ask then how others make their decisions--Brokers' advice? Newsletters? Another guru? CNBC? Gut feel? Or is everyone trying to buy and hold a diversified portfolio?
For me, it was a generalized feeling of angst from other gurus on the web, followed by a call from my broker after much of the damage had already been done. Next time, I'll be more attentive to all the traditional moving averages by asset class.
Thanks.
Could this be true about gold?:
http://tinyurl.com/63rz7z
I know this is about gov. bonds:
http://tinyurl.com/6qhnu9
Portfolio diversification is a personal matter. I maintain a Permanent Portfolio containing approximately 70% of my stock and bond holdings. 30% of security investments go into a Speculative Portfolio, the contents being an informed guess for potential hefty gains.
Importantly, I maintain a meaningful percentage of my total portfolio in diversified rental real estate, which I manage. Rents have actually allowed me to have a loss of less than 8% in total investment return since 1/08, despite making some expensive errors in judgement with stock and bond selection. After the tax writeoffs for the real estate, I will be in even better shape. I also own a wad of IBonds and EE Bonds as a safety net which, finally, performed the function for which they were purchased.
Although "retired",I enjoy being President of three LLCs (Roger is correct - retirement is doing a job you have a passion for). Even more income, and more "diversification".
In short, a holistic approach towards your money and portfolio diversification is a lot more than placing sector weights on your stocks and bonds.
T
Roger - OT, but what are your thoughts on the US bond market? Is this the next bubble?
annon 2:06 - good question on other signals as to when to adjust allocations. For me, I'm doubtful of any signals based on charts. I accept that charts be helpful, but I think fundamentals matter more. Things like dividend yields and PE compared to risk free rates of return are what make me consider changing allocations. Most generally, I compare the inverse of P/E to treasury rates. If stocks don't have a several point advantage, I think it is time to lighten-up. I'd be interested in other's thoughts.
Why does the WSJ print the 65 DMA on its daily and weekly charts and then add the 200 DMA on its weekly charts (Mondays)?
Is it related to Dow theory? Or just make nice busy charts?
The reason the DMA200 crossover strategy is getting so much attention is that it worked well in the past decade. All the people that have been burned 2000-2003 now assume that the DMA200 will keep them safe.
The one problem the DMA200 strategy has is that its results would not be as good if the bear market 2000-2003 had been different, e.g. if we had seen a major crash in 2000 instead of a slow decline over many years. In other word, this strategy is suffering from a major hindsight bias.
It also requires you to act immediately, if you buy and sell 2-3 days later than the signal, the results are worse.
Speaking historically, the strategy worked, as it reduced your drawdowns (it didn't increase the returns though), but believing that this strategy will work in the future can be a big mistake.
Bond market/treasure market is next to blow up
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