In my 10-plus years in the financial industry, it’s become clear to me that ‘buy and hold’ is no longer a viable investment strategy.  In this past decade alone, the market has experienced two of the worst periods in its history (2000-2002 & 2008-2009).  Unfortunately, many investors (or their advisors) continue to use this popular method.  I am always researching and tweaking my investment strategy to try and produce a high return when the market is performing well, but at the same time protect against substantial losses should a downturn occur.  Below is an inside-look at the investment strategy I utilize for both my clients and family (Out at the 200-Day EMA, In at the Gold Cross), and the research behind it.  Just because the market plunges doesn’t mean your portfolio has to as well.

Approaches Analyzed

The purpose of this study was to determine which strategy has the highest return, lowest volatility, lowest drawdown, and highest cumulative return.  The Vanguard 500 Index Fund’s (VFINX) pricing was used from 1/1/1989 to 12/31/2009 (21 years), and dividends were assumed reinvested in each strategy.  Since there was no such thing as an exchange-traded fund (ETF) 21 years ago, VFINX was used.  However, trading costs of $10 for each buy and sell were entered to account for trading costs that are incurred with ETFs.  Taxes were not considered for purposes of this study.  The starting balance was $2,689 for each strategy.

The following outlines each approach:

1. Buy and Hold – As simple as it sounds; buy the fund, and then hold on to the fund.
2. 200-Day Exponential Moving Average (EMA) – If the fund closed below the 200-day EMA, it was sold; it was re-bought when it went above the 200-day EMA.
3. Gold Cross – If the fund’s 50-day EMA went below its 200-day EMA, it was sold; it was re-bought when its 50-day EMA went above its 200-day EMA.
4. Out on Gold Cross / In over 200-Day EMA – If the fund’s 50-day EMA went below its 200-day EMA (Gold Cross), it was sold; it was re-bought when it went above the 200-day EMA.
5. Out under 200-Day EMA / In on Gold Cross – If the fund closed below the 200-day EMA, it was sold; it was re-bought when its 50-day EMA went above its 200-day EMA (Gold Cross).

Results

Source: Sustainable Investment Strategies, LLC   -   Prices by Yahoo! Finance

The final column (Out 200-Day EMA/In Gold Cross) shows the 2^nd highest total return, lowest standard deviation (risk/volatility), 2^nd lowest dot-com drawdown (’00-’02), lowest ’08-’09 drawdown, and 2^nd highest percentage of profitable trades.  This would suggest that the combination of selling at the 200-Day EMA and buying at the Gold Cross achieves the desired results identified.

Would you like a free analysis of your current investment portfolio?  Call me at 913.402.6099 to schedule your appointment.

John P. Chladek, MBA, CFP^® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit http://www.chladekwealth.com.

All written content on this site is for information purposes only.  Opinions expressed herein are solely those of John P. Chladek, MBA, CFP®, President, Chladek Wealth Management, LLC.  Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness.  All information and ideas should be discussed in detail with your individual advisor prior to implementation.  Investment Advisory services are offered by Chladek Wealth Management, LLC, a registered investment advisory firm in the State of Kansas.  The presence of this web site on the Internet shall in no direct or indirect way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services to any residents of any state other than the State of Kansas or where otherwise legally permitted.