Now that we have had an interruption in the steady climb that the markets have provided us, the news is full of ways to address market corrections. Many of those suggestions involve ways to be “satisfied with just sticking it out”. Rob Carrick’s article, referencing some suggestions from a financial planner in 2008 https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-an-action-plan-if-things-get-worse-for-stocks-and-the-economy/ with excellent suggestions, but there is more one can do.
Market corrections are nothing new: check out this chart of the Nasdaq to confirm this fact:
As you probably remember, we experienced an approx. 20% correction in 2018 (followed by a nice recovery and more) and now we are experiencing more “volatility”. Volatility is the polite term financial professionals like to use when they mean correction (another term they use to say “going down”).
You might be asking yourself if there is anything practical you could have done to take advantage of that volatility… well there is. Read on.
Everyone likes stability and steady growth when it comes to their savings… and today many people have entrusted their savings to the markets, in the hope of growing them, to secure a comfortable retirement, when they would like to spend all that lovely money! “Going down” is not the message those savers want to hear. This chart shows you one think clearly: the markets go neither up, nor down, in a straight line.
So what to do?
Well, option #1 is; take less risk and enjoy smaller returns: this means investing in GICs and suchlike, for safety of capital and expect almost no growth in the current interest rate environment… but especially these days, most people want more.
So option #2 is; take some risk, with some of your money, in search of higher returns… this usually means owning some equities – stocks – either individually, or through ETFs (Exchange Traded Funds) or Mutual Funds.
Many ETFs and most Mutual funds are intended as “buy and hold” strategies: the premise is to start an investment strategy and contribute to it steadily over a lifetime so that the combination of savings and the long-term appreciation of the markets will combine to give a substantial increase of value of your nest-egg.
Certainly, this does work. Also, if you are like so many people, just managing your working career, with a busy job and family, leaves little time to may much attention to your savings: most people just stash away what they think they can in a savings/investment program set up for them by some financial person and hope for the best. There a better way, but it does require more effort, on the part of your financial provider, and possibly on your part too.
Let’s look at this next chart (and the earlier one too) to discover a tool which has worked effectively for 100 years or more, to smooth out ones returns from the markets. The previous chart showed about 3 years of data and this one shows 20 years of data. If these charts were extended to include the previous 80 years, it would only underscore the earlier comment about nothing going up or down in a straight line. As well they would confirm that for someone with a sufficiently long time horizon, the long term trend is UP!
So does that mean that “Buy and Hold” is the answer?
Well for someone who has little time or interest to follow current events, or for advisors who don’t have the time or resources for any of this, Buy and Hold strategies may be their only practical option.
But here’s where we get to option #3: for advisors who have systems in place to recognize changes in the markets, and for investors who manage their own investments, and have the time and knowledge to access such systems too, there may be a better way.
This strategy is called “Trend based Investing” and uses technical analysis to “listen” to the markets and react to what they are “saying”. There are many tools used by technical analysts, but we are only going to consider one of them here – the one that is the easiest to follow. Also, it is convenient, that it has also proven to give better results than a “Buy and Hold” strategy, over most time frames.
This tool is called “Crossing Moving Averages”. If you look at the charts here again, you will notice coloured lines in addition to the action of the market. These coloured lines are moving averages (MAs) for different periods of time. On the first chart the market action represents weekly market closes and the MAs are for different numbers of weeks. ON the second chart, the market closes are monthly ones and the MAs represent different monthly periods too. Also, as noted previously, the first chart only shows less than 3 years of data, while the second one covers 20 years.
Now, closer examination shows that when the shorter term MAs cross the longer term ones, they highlight changes in the trend in the market: when a shorter term MA crosses a longer one positively, it confirms a move up; conversely, when the MAs “cross down” they warn of slowing momentum in the market. Hence, MA crosses can be used as useful buy and sell indicators.
Are you curious to learn more about this and other trend-based strategies, to arm you with tools you can use, to turn the market trend changes into your friends? Follow this LINK to take you to Session 4 of the Canadian Investors Course: Finding Stocks to Buy or Sell, to see how the MA strategy worked for the DJIA since 1900!
All this information, and more, is available to you at www.localwealthprofessionals.com. After you have checked out the CIC you might be interested in some of the articles and videos to help you become even more knowledgeable. Knowledge is POWER!