How To Potentially Protect Your Portfolio From A Sudden Market Downturn
Del.icio.usWhen I’m cond ucting seminars a round the country, I’m frequently asked how to protect an investment portfolio from a sudden market downturn. Obviously, the memory of the recent bear market is still fresh in the minds of many investors who want to avoid the pain that the last market correction inflicted on their portfolios.
I always answer the question the exact same way, “It depends on your investments, your investing time frame, and your risk tolerance. However, assuming you’re investing with all of those factors in mind, one way to potentially protect a portfolio from a market correction is to monitor the price of each holding in the portfolio and then compare that price to a long term moving average price of that same security or mutual fund.
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That’s exactly the method that USA Wealth ManagementTM uses to determine when to buy and when to sell a mutual fund in one of our allocation portfolios. Let me explain exactly, step by step, what we do on a daily basis.
First we monitor the share price of the mutual fund that we’re holding and plot the daily closing price on a chart.
Once we’ve established a chart for each security that we’re holding, we then perform one additional calculation and plot the results of that calculation on the same chart.
This calculation is a moving average calculation. The moving average that we typically use is a 150 day moving average. To calculate the 150 day moving average, all daily closing share prices of each fund from the last 150 days are added together and then divided by 150. It’s the same way that any other average would be calculated.
The 150 day moving average value represents the market’s average ‘consensus of value’ of that fund over the last 150 days. The current daily closing price represents the market’s current ‘consensus of value’ of that fund.
Here’s the theory. If the market’s current ‘consensus of value’ is greater than the average ‘consensus of value’ over the last 150 days, the price trend of that fund is considered to be up and we would invest in that fund.
On the other hand, if the current share price of a fund is lower than the average ‘consensus’ of value over the past 150 days, the trend is considered to be down, and we would not invest in that fund.
To learn how to use moving averages in your portfolio, attend one of our informational seminars, please contact our offices.
Investing in mutual funds involves risk and an investor’s account may lose value. The identified strategy does not guarantee complete protection from a market downturn or market losses.
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