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Here are the current top three stories in the NY Times Business Section as of 9:30pm ET, July 28th:

“Fraidy Cat”?  C’mon, Walter, can’t you do better than calling people names and making fun of them when they get nervous?

http://money.cnn.com/2007/11/29/pf/expert/expert.moneymag/index.htm?postversion=2007112910

Since this article was posted by Walter Updegrave on November 29th, the market (as measured by the S&P 500) is down more than 7%.  That’s more that it gained during all of 2007.  But Walter says you can’t time the market.  Walter says “That’s why calling turnarounds in the stock market is an iffy business at best. Ultimately, it’s a guessing game that isn’t worth the effort. I say you’re much better off setting a mix of stocks and bonds that makes sense given your planned retirement date and then sticking to that mix regardless of what the stock market is doing at any given moment.”

I say he’s wrong.  I have a very simple strategy - I move in and out of the stock market according to when the 75 and 200 day EMA’s cross.  For example, move out the week of Nov 27th, 2000 (S&P 500 at 1315) and put the money into either money market or bonds or split between the two. (More on how to choose between bonds and money market funds later).  It stays there until the 75 day moves back above the 200 day EMA, which was the week of June 9th, 2003 (S&P 500 at 988).  You stay in until the week of Jan 14th, 2008, when you sell at 1325. 

Note:  I only check the market at the end of the week, so I normally have a clear crossover point if there’s been a change during the week.  I haven’t defined “clear”, but lets just say the lines have crossed by more than 1%.  Look at the direction they’re heading (up or down) if you can’t decide.  Or simply wait another week until the direction becomes clear to you.  A week is nothing in the time frames I’m talking about.  It may mean 1 or 2% difference, but I don’t care about that.

By using this strategy, you’ve captured the majority of the upside, and you’ve missed the majority of the downside.  If there’s not a clear crossover point, you stay with what you were doing.  So if the market has no clear direction (such as in 1994), you’re either in or out - depending on what the last clear crossover point was.  You won’t make much during these times - but you won’t lose much either.

So right now (Jan 28th, 2008) you should be out of stocks.  Yes, you’ll miss a big up day - or even a big up week - but we’re looking for long term trends, not the flavor of the day.  As Will Rogers once said “I’m much more interested in the return of my investment, than the return on my investment”.

But guess what?  By following the above strategy, you’ll beat the snot out of a buy and hold investor - and you won’t be jumping in and out of stocks so often that you end up paying a lot of transaction or broker fees. 

Note: By using this strategy, you will not get out of stocks soon enough to miss huge one day losses, like the crash of 1987, or the big drop in July/August of 1990.  And you’ll be sitting either in or out of stocks when the market has no clear direction, such as pretty much all of 1994.  There will even be times (such as the two instances I just mentioned) where you’ll buy back in at a higher price than where you sold.  Remember, this strategy isn’t for short or intermediate term trading and it doesn’t work for that.  It’s only meant to be a guide for long term trends, such as the bull market of the late 90’s, the bear market of 2000 through 2003, and the bull that took us through 2007. 

Yup, you’ll be sitting on the sidelines on some huge up days, and you’ll be fully invested during some big down days, but you’ll do better than the market as a whole, because you’ll be out of the market when bears are eating everything in sight, and in it when bulls are charging.

How are those buy and hold guys doing since 2000?  If they’re lucky, they’re almost back to even.   If you had put $1000 into the S&P 500 on Jan 1, 2000, and you left it alone (you’re a long term buy and hold investor like Walter!) that $1000 investment is now (Jan 28th, 2008) worth $1011.87.  You made $11.87 TOTAL in the past 8 years.  If you had followed my strategy, you’d have a lot more.   I’m too lazy to do all the math right now, look at a chart and see if it makes sense to you.  I may come back to this later when I have more time.

Anyway, I told you I’d tell you how to choose between bonds and a money market fund.  If interest rates are heading down, as they obviously are right now - at least it’s obvious to anyone with warm blood in his brain - you go into bonds.  The price of bonds rises as the interest rates fall.  If rates are rising, move your money into a money market account.  If you can’t guess which way rates are going, split your money between the two.  You may not make much, but at least you won’t lose much either.

So I disagree with Walter - it’s OK to be a “Fraidy Cat” - just have a plan for when you move in and out of stocks.  I think my plan works well, but you may have something else in mind.  If you have a long term trading strategy that works for you, pass it on.  Post a comment with your strategy for all to see.  Walter will disagree, but others may still find it useful. 

gk