When do you make money?
When you invest your money, there are five potential outcomes:
The large gain and the large loss usually happen in extreme markets. The other three outcomes happen in normal markets. To protect your investments, you need to minimize large losses. The success of your portfolio and your retirement depends on how successful you are avoiding such extreme losses. The bottom line is, if you can avoid, then markets can probably take care of your portfolio.
I use a technical analysis tool called the “simple moving average ” on a monthly chart. Here is how it can help you:
Draw the 5–month moving average, the blue line on the chart.
Draw the 12–month moving average, the red line on the chart.
When the blue line moves below the red line and the red line is declining, then markets may be going into a bearish trend. Go defensive with your equities.
When the blue line moves above the red line, the storm is mostly over, you can repopulate the equity portion of your portfolio.
If you are still in the accumulation stage, never hold more than 60% equities. If you are in the distribution stage, never hold more than 50% equities. The rest of your money should be allocated to fixed income.
For more information, see my book, pages 288 to 293, “Unveiling the Retirement Myth".
Disclaimers: Future performance of any charting system or technical analysis methods will not be the same as in the past. Technical analysis requires investment discipline and is not for everyone. With any technical analysis tool, it is unlikely to get the signals right at the market tops and bottoms, and, therefore slippages will occur. This particular set of moving averages can indicate the longer term trends and they do not apply to sector or stock trading, which require shorter time frames. Consult your financial advisor before engaging in any investment activity.