Long Term Investing

In his wonderful book, 'Multiple Streams of Income', best selling author Robert Allen advises Investors to divide their Stock Market investment and trading capital into three portions -50% invested long term (forever) in an Index Fund, 30% invested in Accelerated Stock strategies and 20% in options or high risk investment strategies.

This article will discuss long term investing and how technical analysis can alert us to points in time when it is prudent to take profits and exit the Stock market.

Not diversification for the sake of it, but diversification to help us sleep at night and enhance our long term returns.

Multiple Streams of Income was written in the year 2000 - the 18 year Bull market had made millionaires of anyone who bet the farm on Stocks rising forever - but investors needed an exit strategy of some sort in case the trend didn't continue, and too many of them didn't have one.

Now many are paying the price.

For years, buy and hold was a no brainer - just buy the dips and the Stock market made you rich - until it all came to a sudden end in the year 2000.

So, what do Investors, as opposed to traders, use as an exit strategy?

The weekly chart below is the S&P 500 with two moving averages, 20 weeks and 40 weeks. Charts available at StockTradingReview.com

An excellent strategy that some of Peter's friends use is to hold this Index when it's going up, and to exit or hedge your position on a moving average crossover on the weekly chart to conserve profits when it starts going down.

After all, if it's not rising in value, why own it?

Long term wealth creation demands that we prudently invest in assets that are rising in price, despite short term corrections against the major trend.

These two moving averages give a graphic display of the major trend. When the trend is up, they stay long - when it's down, they stay out, hedge their positions or go short - simple.

By placing these two moving averages on this chart, it allows even someone the age of Peter's daughter to tell him the direction the market is taking.

It protects capital that would otherwise be invested in this Index for investment in other areas, because it avoids being in this market through the downtrends.

Of course, the Index Fund managers hate people who switch from fund to fund or to cash when the trend changes.

They want investors to stay invested forever - management fees and trailing commissions may have something to do with this...

Many traders regularly receive a publication from one of the big Index Fund managers and they are always advising him that it's time in the market, not timing the market that is important - if they say it often enough then it starts to sound like it makes sense.

The chart above is graphic proof that even a 7 year old can time the market to some degree given the right tools. Charts available at StockTradingReview.com

How simple - 2 moving averages saved a fortune for anyone who was watching. Why hold something that is obviously falling in price.

The same two moving averages got investors in again when the trend turned up.

This strategy didn't give an entry signal until May 2003, 2 months after the low, but anyone who hedged or exited on the moving average crossover in November 2000 missed being fully invested during the majority of the Bear market, when many investors lost between 50% and 70% of their capital, or worse if they were leveraged.

And remember, for savvy traders this is for long term investment in Stocks, not our more speculative holdings.

This is their wealth creation money - their retirement account. This is the money they don't put at unnecessary risk.

When the market goes down like this, Fund Managers call it Volatility. They won't call it what it really is - a Bear Market!

No, investors would take their money out of Mutual Funds if the Managers said that we were in a Bear Market, and they would lose those wonderful trailing commissions and management fees.

Just call it a bit of volatility (down 50% on the S&P, 80% on the Nasdaq - volatility??) and investors will stay in for the long term because that's what their advisers tell them to do, or they will miss the bottom when it eventually comes - does that make sense to you?

Now nobody can tell for sure how far any rally will go, or if a bear market is over, until well after the event. But this simple Moving Average crossover system has kept Peter's friends on the right side of the market for many years.

They ride the up-legs of the market, and stay out of the down legs. They put their cash in Money Market Funds while the trend is down and wait for the rallies.

Another hedging strategy they often use is to buy Put options to cover their entire Index exposure - for example, if their Index fund position is $50,000, they buy long dated put options, say 12 months to expiry to minimise the time decay, to cover this level of market exposure.

They think of it as an insurance policy - they pay insurance on everything else they own, so why leave their Stocks and Mutual Fund investments at the mercy of the market - wealthy people stay that way because they protect the downside.

Time decay on options is an issue of course, but watching a long term portfolio decrease by 50% or more and doing nothing should not be an option for any serious investor.

The idea is simply this - saavy traders hold positions that are with the trend, whether it is in Property, Shares, Mutual Funds or Bonds. They do not hold un-hedged assets that are in a sustained downtrend.

Holding Stocks and funds that are going up is like riding the up escalator, it's easy to make money. By holding Mutual Funds or Stocks that are falling, it's like running up the down escalator - you have to work hard just to stay in the same place.

Then, if you stop running, it takes you right down to where you started again. This is not the way to build lasting wealth.

This is blindingly obvious - but it is amazing how many otherwise intelligent investors have lost fortunes during the bear market that started in 2000.

A smart trader's advice - put a couple of Moving Averages on the funds and Stocks you hold in your long term investment portfolio, then ask a small child what the trend is.

If they don't say up and you're still invested, all he would say is make sure you have your position hedged!

To Your Trading Success,

Tony Spann and the Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Join our FREE "Stock Trading Review" NewsLetter http://www.stocktradingreview .com/stock-trading-newsletter.html get your hands on some real world "insider" stock trading tips and techniques and access to our exclusive "Members Only" Free Stock Trading System.

You have permission to publish this article electronically or in print, free of charge, as long as the bylines are included. A courtesy copy of your publication would be appreciated.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

Copyright(C)200 5 Stock Trading Review - All Rights Reserved.

In The News:


Bloomberg

ETFs Are Giving Mutual Funds a Run for Their Money
Bloomberg
Mutual fund ownership of equities is at its lowest level in nearly 13 years, according to a research note from Goldman Sachs Group Inc. Meanwhile, exchange-traded funds are becoming an even bigger force in the stock market, the team led by Chief U.S. ...

and more »

Barron's

ETFs Chasing Mutual Funds as Stock Buyer
Barron's
ETFs are creeping up on mutual funds as a dominant player in the U.S. stock market, writes Bloomberg. Mutual funds' outflows since last year have driven their equity ownership to a nearly 13-year low, according to Goldman Sachs. ETFs, meanwhile, are ...


Forbes

The Stock Market's Half Trillion Dollar Problem
Forbes
In the simplest terms, when added together, everyone else is selling. Mutual funds, pension funds, and households are set to dump stocks. The buying will come from exchange-traded funds and foreign investors, as well as the corporate buy-backs ...

and more »

US-based stock mutual funds take in most cash in a year -ICI
Reuters
By Trevor Hunnicutt NEW YORK, March 1 Fund investors' aversion to riding the market's highs showed signs of waning as stock mutual funds attracted the most cash in a year in the latest week, Investment Company Institute data showed on Wednesday.

and more »

WealthManagement.com

Mutual Funds Still Dominate the Stock Market, But Here Come ETFs
WealthManagement.com
Mutual fund ownership of equities is at its lowest level in nearly 13 years, according to a research note from Goldman Sachs Group Inc. Meanwhile, exchange-traded funds are becoming an even bigger force in the stock market, the team led by Chief U.S. ...


Utility Stocks for Retirement Investors: 1 Stock, 1 ETF and 1 Mutual Fund
Investorplace.com
While utility stocks have taken it on the chin lately with the Federal Reserve starting to raise rates, the reality is, they still make sense for retirement investors. Utilities For Retirement Investors: 1 Stock, 1 ETF and 1 Mutual Fund. Source: 401(k ...


CNBC

Why mutual funds could be on their way to another lousy year
CNBC
The improvement comes amid multiyear lows in the tendency of stocks to correlate up and down together, as well as an elevated level of dispersion, or the difference between returns for various sectors. Stock pickers in actively managed mutual funds ...
Stock pickers lift performance in battle of the benchmarksFinancial Times

all 4 news articles »

5 Aggressive Growth Mutual Funds to Buy in March
Zacks.com
This category of funds also invests heavily in undervalued stocks, IPOs and relatively volatile securities and seeks to profit from them in a congenial economic climate. The securities are selected on the basis of a company's potential for growth and ...

and more »

Forbes

5 Best Funds For Your 401(k) And IRAs
Forbes
Over the last few years, mutual fund companies and discount brokers have been duking it out to see who can offer the lowest-cost ETF. An ETF is like a mutual fund that pools a wide range of stocks and bonds, only it trades on stock exchanges. It's an ...

and more »

Market Realist

How Hedge Funds and Mutual Funds View Financial Stocks
Market Realist
According to Goldman Sachs (GS), hedge funds have reduced their position in financial stocks (XLF). However, mutual funds have strengthened their position in financial stocks. In the last one month of market rallies, financial stocks have led the gains ...

and more »
Google News

Overseas Investing: Going Against the Mainstream

TOO OFTEN, INVESTORS SIMPLY CHOOSE TO follow the crowd. This... Read More

No Load Mutual Funds or Exchange Traded Funds (ETFs)?

If you are fed up with early redemption charges and... Read More

Analyst Reports

When you become interested in a stock or mutual fund... Read More

Stock Market System ... ONLINE STOCK TRADING ... Beyond Day Trading Basics & Tips

Day trading is all about making buy and sell decisions.... Read More

Patterns

The Law of Chaos is the theory of random unpredictable... Read More

Emotional Maturity

If you are going to be a winner in the... Read More

Buy Low - Sell High

Now where have I heard that before? I know. It... Read More

Stock Market Diversification

In one of my previous articles (Investing in the stock... Read More

Shadow Bull

As one of my regular readers you know I have... Read More

Finding A Good Stock

One of the things people are always asking me is... Read More

Never Lose Money

Never lose money in the stock market again. Yeah, I... Read More

Pamplona, the Wild Investment Bulls

You remember (they show it on TV every year) the... Read More

Mr. Market

I constantly hear the talking heads on CNBC-TV, the radio... Read More

Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Buy high and sell low -- It's not a typo.Millions... Read More

Mindset

In 1960 an engineer working for a watch company in... Read More

This Market Is Different

All of the talking heads have been telling us that... Read More

Hedge Fund Advertising

Have you seen all those big full page ads for... Read More

Size Counts!

What the heck am I talking about?It is often said... Read More

Investment Clubs

Because you don't feel too sure about which stock or... Read More

The Big Bad Bear

The big bad bear is stirring again. So far he... Read More

Whitewater Stock Market

Ever done any whitewater rafting or canoeing? Long periods of... Read More

Some Good News for A Change

Before we get into all the good news out there,... Read More

Selling Strategies - Setting a Stop Loss

Sometimes the best way of lowering exposure to risk is... Read More

Stock Insurance

You have a lock on your house. You have a... Read More

Making a Stock Watch List

I am taking the time to help others learn the... Read More