Personal Finances Part 2... Investing, the Neglected Skillset by David Yeh, MD

Can we improve on our investment technique?

( a mutual fund that invests in the 500 largest companies as ranked by Standard & Poor, in this example, ticker symbol VFINX) has lost about 50 % twice in the last 16 years, each time taking years to recover. But what if there is a way to sidestep at least the larger bear markets like the markets of 2000 and 2007?

Figure 3 also shows a smoother curve, which is the 20 month Simple Moving Average( SMA): the line is nothing more than a plot of the average price of the last 20 months of the mutual fund. It’ s very easy to calculate, and there are free websites that can calculate it for you. If you notice that when the mutual fund is above the 20 SMA line, the fund tends to go up. You’ d also notice that when the fund is below the 20 SMA line, the fund tends to be dangerous and go down. If you check this 20 month SMA number once a month, no sooner and no later, and just get out of the stock mutual fund and switch to a bond mutual fund when the stock fund goes below the 20 SMA line, you might have gotten results as shown in Figure 4.

Figure 3

Fear of losses is a difficult fear to overcome when investing, and rightly so; we’ ve seen that losses are larger than they seem. And fear only magnifies when real hard-earned money is in our investment account. After all, a 50 % drop means we have to make 100 % just to break even, and that can take years. In fact, Figure 3 illustrates how an S & P 500 index fund

In Figure 4, the VFINX is the S & P 500 Index mutual fund, and the VUSTX is a Long Term Treasury bond fund. The thin smooth line is the 20 month SMA line. When the stock fund is above the 20 SMA line, we stay in the stock fund. When the stock fund is below the 20 SMA line, we sell the stock fund and move into the bond fund. When the stock fund goes above the 20 SMA line again, we sell the bond fund and buy the stock fund again. The result is the