Embrace the Pain-Bear Market Strategy from Finance Buff

[free4now]

It's interesting that Ben Stein advocates following the strategy of using 15 year moving average for timing signals. A long time ago I used to follow Doug Fabian, who advocated using a 39 week moving average, selling when the index drops below and buying when it breaks above.

It's been interesting looking at Doug's recent mis steps. He has recently been making more and more exceptions to his own model, and his performance has paid the price. Here are three articles from Mark Hulbert who tracks Doug Fabian's results:

http://www.marketwatch.com/News/Story/sell-signal-fabians-system/story.aspx?guid={78DB13F1-AF34-49A2-928E-C9ED511473CB}

http://www.marketwatch.com/News/Story/wisdom-richard-fabians-system-emerges/story.aspx?guid={68A17EE7-0E91-4593-A96B-B594C61A6E89}

http://www.marketwatch.com/news/story/back-testing-39-week-moving-average/story.aspx?guid={B80A2F29-6BEA-4C30-96F8-415D4399A12E}&dist=msr_5

You can see that even though Hulbert has been following this for 25 years he hasn't quite settled into an opinion about whether this approach works going forward.

At any rate, the devil is in the details, especially one: If you delay your trades for any reason (e.g. you're in the shower when the stock market generates the signal), you're likely to be worse off for the delay. The whole idea of the system is to sell when the market is going down, and buy when it's going up, so delaying worsens your price.

Then there is the whipsaw issue: if the current price crosses the moving average more than multiple (which is normal), then you're either going to have to trade like a fiend or accept that you could miss out. Fabian "solved" this issue by not doing any trades until it moves another 5%, but that is 5% that you end up losing in some cases relative to the buy and holder.

Ben Stein's approach of using the 15 year moving average seems like a good way to minimize the trading hassles, but if you only make trades once every decade or so are you really going to feel confident with how to handle whipsaws when they come? I'll stick with buy and hold.

 

[Gone4Good]

Doesn't seem like a safe approach for someone who is living off their portfolio. Increasing your equity exposure to 85% when the market goes down 50% surely will get you well positioned for a recovery, but if things go further south you'll have few options besides jumping out of a window. Kinda like "double or nothing".

This certainly occurred to me as I was rebalancing during this most recent free fall. I felt pretty smart rebalancing when the market was off ~35% . . . for about 1 day. Then it fell another 20% and I was struggling with the decision of whether to rebalance again. But after rebalancing once, my fixed income portfolio already started to look a little lean when compared against my possible short-term needs. So I decided to wait.

Using the methodology of the article, if one were to rebalanced to 70% after the first 30% decline and then rebalanced to 80% after the decline reached 50%, the typical 10yr fixed income bucket (60/40 portfolio with a 4% withdrawal rate) would be reduced to just over 3 years. Probably a smart move for someone who plans on working for a long while, but a huge leap of faith for a retiree.

 

[thefinancebuff]

Using the methodology of the article, if one were to rebalanced to 70% after the first 30% decline and then rebalanced to 80% after the decline reached 50%, the typical 10yr fixed income bucket (60/40 portfolio with a 4% withdrawal rate) would be reduced to just over 3 years. Probably a smart move for someone who plans on working for a long while, but a huge leap of faith for a retiree.

A retiree should have more than 40% in fixed income to begin with. They should also draw up their own overbalancing tables if they do it at all.

 

[Notmuchlonger]

A retiree should have more than 40% in fixed income to begin with. They should also draw up their own overbalancing tables if they do it at all.

No, not every retiree needs to have x amount in fixed. Thats wrong.