Either you’re a buy-and-hold type who’s convinced about the existence of the equity premium over the long term and who happily ignores all intraday volatility, or else you’re a high-frequency trader who loves to make money on a tick-by-tick basis. Everybody else is liable to get stopped out, or otherwise crushed. And in many ways, the only winning move is not to play.
I am all for exploring different ways to get the job done and have written quite a few posts along these lines but I've never been an advocate of not playing. It is very easy to believe that asset allocation and portfolio construction are each evolving at some rate (you can decide if this evolution is fast or slow) due to current events and advancements in investment products. I do not believe evolution means not playing.
Many articles and TV segments seem to frame the conversation in very narrow terms that I believe are impractical. First if Felix literally means not playing at all, going 100% cash; this is very problematic due to commission drag, possible tax consequences and biggest of all which would be going to cash at literally the worst time possible like maybe March 9, 2009.
It is important to have some context before figuring out the best course for you to take. How did September 29, 2008 permanently change your financial life or the financial life of anyone you know? Without looking, do you even know what happened that day? What about October 27, 1997? On that day in 2008 the Dow fell 778 points, the largest single one day drop in terms of points, and on that day in 1997 the Dow fell 554 points in the Asian Contagion and closed early that day. Do you even remember that in the two weeks after the 778 point decline there were two other days that the Dow fell about 700 points?
How many times do you hear CNBC interviewers ask whether investors should sell now or what sectors they should buy now and it is rare where the answer offers something a little out of the box.
In terms of when to sell I obviously believe in a predetermined exit strategy. I use the 200 DMA but there are many that can achieve the same result. The simplest way to look at this is that if demand for equities shows signs of being unhealthy then doesn't it make sense to have less exposure? As noted there are quite a few ways to assess the health of the demand, it takes very little analytical skill to see whether the 50 DMA has crossed below the 200 DMA (as another example) so then it boils down to having the discipline to stick with a predetermined exit plan.
Often you hear the question on CNBC framed as "what will treat my money the best?" The answer of foreign stocks is not mentioned frequently enough. If you watch sports you will sometimes see stats of two anonymous players put up side in a sort of blind test with the question being which one is more likely to be an all star or hall of famer and often when the names are revealed the player you might have picked ahead of time actually has the inferior numbers.
Well if you did the same thing with the US' economic stats my hunch is that there would be very few countries excluding Big Western Europe and Japan where owning the US made any sense. Someone once said investors are more comfortable losing money in a place they know than making money in a place they don't know or words to that effect. If anyone knows who I am paraphrasing please leave a comment.
Without entirely repeating yesterday's post it is only logical to invest money where it will be "treated best," avoid lousy fundamentals and I think take some defensive action. The Bogleheads would say no to that last one but interestingly, and you may know this, Jack Bogle has made some pretty good calls in his time; very good actually.