Actually, I want my money in play at all times (such as following an Index), but only to my target asset allocation. Otherwise, during the upswings if I was trying to time the market, what if I time wrong and miss the opportunity?
It's not 100% impossible, but it's very unlikely. If the market goes up, the average turns up. If the market goes mostly sideways, or crawls up really slowly, then it's theoretically possible to miss it. But in that case you're not missing much anyway, and your money is probably better off in a bear-market position like bonds. If there is a genuine "opportunity," this simple approach will catch it. That's how the math works.
You're worried about missing an up move. Why aren't you worried about *hitting* a DOWN move? Both will damage your final result.
What happens if the previous month's *low* price is higher than the average AND the previous month's high price is lower than the average? Would you simply keep the current signal?
I assume you're talking about two different months there, otherwise it's not possible.
If the low crosses over the average -- that is, if the just-closed month's low is higher, and the previous month's low is lower -- then you buy. (Or you switch into a more aggressive bull-market mode, however you want to handle it.) If the high crosses under the average, you sell.
It impresses me that the human mind can observe 100 years of historically random returns and assume that (1) they're not just random
They're NOT random. Anybody who says they are hasn't studied it carefully, or they don't understand basic math.
That's simple to demonstrate. Coin flips are random. Over a large sample of flips, you converge to 50% heads. If the stock market was random, then with a large sample you should have close to 50% up days, or 50% up months.
I just did a coin flip simulation of 992 flips. In 10,000 trials of 992 flips it was never more than 5.8% away from 50%. But since 1928 there have been 992 months, and 58% were positive. That's many many standard deviations away from 50%, enough to be extremely certain it's not random. **70%** of all years since 1928 were positive.
There has been a strong and consistent -- NOT random -- upward bias in the market, even including the Great Depression.
Look at a log chart of the Dow and it's almost a straight line from 1932 to 2000. In fact the correlation between the Dow (log chart) and a straight line is 0.95. That is nothing CLOSE to a random process.
If it was random, the correlation would be near zero. If it was random, B&H wouldn't work. If it was truly random, NOTHING would work. There is no strategy that can reliably make money in a random market, unless you slant the odds. You're totally at the mercy of a random event, hoping for a string of heads.
Of course, even though the market has a strong upward bias **over the long term**, in the long term you're *dead*. The century-long uptrend doesn't help you much if it spends 40 years going sideways, or if it pulls a Japan on you. That's why I think it makes sense to improve your odds.
and (2) that they won't work anymore.
Much of that upward march was driven by huge external events: a rapidly expanding world economy; the emergence of the US as a world power; the growth of a thriving middle class; huge technological shifts such as the automobile, electronics, and computers; and the almost unlimited availability of cheap energy. While technology will continue to march on, those other conditions are not likely to repeat in the next 50 years.
As SamClem has also observed, I don't know anyone who invests all their worth in just one index for two decades solely for the pleasure of getting the crap pounded out of them.
And obviously the SPY example was a simplification. While you certainly could trade it that way, that's not optimal. If you have any stock-selection skills, you should be able to beat the market. But no matter how good a stock-picker you are, you probably do better in a bull market than in a bear. If you DON'T have good stock-picking skills, then you probably hold index funds, and by definition those do badly in a bear. A flashing neon sign that says "BEAR MARKET" might help you to adjust your strategies to protect your assets and even grow them more effectively.
What might be more enlightening is a financial research paper analyzing the effects of a diversified portfolio which is occasionally rebalanced.
Yes, I would find that interesting too. I haven't seen any studies of the results of rebalancing and I'm not quite sure how I'd test it.
Come to think of it, there's:
3) The number of not-yet-retired ERs who feel that the retired ERs aren't doing it right.
You do it however works for you. I'm just trying to offer additional tools. I will point out, however, that the current ERs built much of their retirement boodle during one of the biggest, if not THE biggest, bull markets in recorded history. It would be foolish to assume lightning is going to strike again, soon enough to do us any good.