Alternatives to buy-and-hold investing: trading, but slowly (not day trading)

Investing
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I’m going to start this thread as a thought-provoking piece, I’m not criticizing what anyone does with their money by posting it, I’m not trying to elevate this line of thinking, none of that. Not trying to start a flame war. I posted a thread like this years ago in the old community, and got dumped on, and if it happens again I’m just going to delete it because who needs that? If this thread offends you… stop reading it.

But here’s the thing… simple, slow (monthly, not day-trading) trading methods like the 10-month moving average method can save your bacon during bear markets, and guess what, the 10-month moving average threw a sell signal on Friday, April 29. Disclosure… I did sell most of my stocks on Monday May 2, I will keep a few because I think they are undervalued diamonds in the rough.

Reading list:

A Quantitative Approach to Tactical Asset Allocation by Meb Faber

Advisor Perspectives moving average tracking page, which has some great charts showing past signals, including some going back to The Great Depression

What Is the 200-Day Simple Moving Average? (investopedia.com) {200 trading days is about 10 months}

A live simulator showing Vanguard VFINX and the 10-month moving average method versus buy-and-hold VFINX. VFINX is an old S&P500 mutual fund.

The point is not to get more returns, but avoid withering drawdowns and sequence of returns risk. Unfortunately, human nature being what it is, this is terribly hard to stick with during uptrends, because you get “fire drills” which sap your returns, and then you feel badly when your friends are making more than you in Gamestock and Crypto, and you think, “Argh, why am I bothering with TAA on the S&P500 index, I should YOLO!!!”

Then the end of the bull market comes. Are we there? I don’t know. I just follow my rule.

Rule: compute on the last trading day of the month the 10-month moving average of the S&P500. If stock prices close above it, hold stocks. If they close below it, sell stocks. You can apply this rule to 0%-100% of your portfolio. It’s your money, make your own decisions.

Wall Street does not buy-and-hold, but they tell retail investors to buy-and-hold. “Where are the customer’s yachts?”

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I’ll see your Meb Faber and raise you one Warren Buffet and one Daniel Khaneman.

And… be aware that I’m holding a Nassim Taleb in reserve… just in case I need it… :nerd_face:

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Except following rules-based TAA isn’t “picking”. The only picking going on was making the decision to follow the rule. Everyone who criticizes TAA calls it “picking” or “timing”. It isn’t, never was, never claimed to be. That’s akin to saying, “I don’t like red because it’s blue!” Huh???

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He’s a quant!.. read up on the 2008 financial crisis.

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Elliot wave theory was a big nonsense burger on the CH boards in 2008. Far from the market going to the Middle Ages, it recovered strongly.

You can buy a deep ITM Leap S&P call in case the market direction is different than you expect.

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Elliott wave is very susceptible because it always needs a human interpreter. 10-month moving average has no such weakness. The only weakness, as always, is if the user gets the FOMO and unbuckles the seatbelt because he’s in GameStop and YOLO

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The fundamental question when considering all the get-rich-quick schemes that cost you money to use is: “IF they were as good as the seller of them says they are, why is that person selling them so cheap?”

Why not just use the system to make $100B and sail off into the sunset on your megayacht?

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A get rich quick scheme is to take the risks inappropriate to a long term plan.

Market timing or utilizing leverage with options will ruin your long term financial security. That said using options as a hedge can reduce the risk of being outside the market.

There’s a huge difference between buying 1 S&P call and holding $32,000 in cash and buying 5 SPY calls getting rich in the short term only to get wiped out when the market goes towards the strike price eventually. The risk and return are lower

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H200h and Smartpolitcs are both completely mischaracterizing my initial post. It’s not Elliott Wave, it’s not get rich quick, it’s not options. Read the original post before posting your straw men, please!

In fact, if you look at the image, you see returns are about the same, what is different is drawdowns are much better, so sequence of returns risk for a pre-retiree or early retiree is decreased. Risk-adjusted returns are better (Sharpe and Sortino ratios).

The only “whatabout” question I will bit on is:

The fundamental question when considering all the get-rich-quick schemes that cost you money to use is: “IF they were as good as the seller of them says they are, why is that person selling them so cheap?” Why not just use the system to make $100B and sail off into the sunset on your megayacht?

Technicals like 10-month moving average cost you nothing to use. No seller, certainly not me. I don’t earn anything based on what you do. These tools are in the public domain. Why doesn’t everyone use them? Because although beneficial, they are hard to use. People are subject to “herd mentality” they don’t like being different. Also only a few % of people take Social Security at 70. Only a few % of people are really, truly retirement ready. Why is that? It’s all hard to do and takes thinking.

That won’t stop me from putting forth what I think are good ideas. I’m not discouraged about the “whataboutisms”.

I’ve been investing since 1986, have a seven-figure portfolio, and I just want to pass on knowledge to younger people for free before I get shipped off to the nursing home and shoved into a corner with my applesauce (my daughter threatens me in this way).

There are a few things I wish I had done over the years:

  1. bought gold in 1999 - but everyone hated it… “useless yellow relic with no yield”
  2. bought 30 year US Treasuries in 1981 - but everyone hated them - horrific capital losses the four years prior - dead money
  3. bought Bitcoin at $100 - I had the opportunity, but I was afraid what people would have thought - “honey I bought $1000 in Bitcoin! you WHAT???”
  4. Learned about trendfollowing (10 month moving average and similar technicals) before the post-2000 Tech Crash and Great Financial Crisis

To my credit, I went to 40% stocks in early 2008 at age 47, which was a stellar move, then I use that fixed income to buy the Obama dip in 2009. I was doing the “guesstimate”, seat-of-the-pants version of trendfollowing. Now I have a strict mathematical methodology that would’ve gotten me the same results, which is greatly comforting.

1,2,3 probably will never repeat in my lifetime. 4 is repeating now, as of April 29, 2022 at 4 PM Eastern.

If you have constructive throughts based on what I actually posted, I will respond. If it’s just drivel I will ignore it.

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Using technical analysis to decide when to get in and out of the market is really bad advice.

Using options is also bad advice. People speculate in options or pay too much for them or buy at the money and out of the money options; as these only have time value, they’re the most expensive

But there is a business reason for options. Buying stock is similar to buying a call and selling a put and putting the remaining money in a money market account, I-Bond, CD, or 1 year Treasury note

Likewise depending on what makes most sense you can sell 100 shares of stock and buy a call option or buy 100 shares of stock and buy a put. Which strategy makes more sense will depend on market dividend and interest rates.

I usually prefer stock replacement because even when factoring for dividends that you don’t receive on call options, it’s cheaper than a protective put.

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Do you mean sector rotation when you mean stock replacement?

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No sector rotation is again trying to time the market. You’re attempting based on moving averages which sectors will do well over the short term whether days, weeks, or months. I’m referring to using options as an alternative to completely sitting out of the market

Stock replacement is using call options instead of owning the underlying. Instead of buying 100 shares of the S&P for $41,000, maybe you rent the S&P at a strike price below $410 such as $300 for $13,000 - $11,000 is intrinsic value and $2,000 is time value. The interest rate or time value is 4.1% ($2,000 / $30,000 for 586 days instead of 365 days) and you forgo a 1.33% dividend so the actual cost is 5.43%. By contrast an ATM call will have an actual cost of 9.0% APY (12.6% total cost for 586 days) as the cost of $5,166 is time value and $134 is intrinsic value.

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@ochotona… it appears you chose to respond to my reply to Smartpolitics and not to the reply I had made to your post…
My reply to your post concerning Meb Faber dealt with the fact that he is a quant. Quants are great at bringing their talents to the table to help thrash through the uncertainties present in hard data scenarios within the bounds of numerical parameters.

A major reason quants have proven ineffective and error prone when it comes to predicting the stock market is because buy and sell decisions are made by people. And people make emotionally-driven decisions, their decisions are not mathematically predictable.

Some folks seem to feel that because you can make graphs and charts using historical data tracking human decisions that they can use the same techniques in forecasting human behavior.

Historical data has proven that premise invalid.

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@Smartpolitics Ok I see yes that could work but then the participant is choosing the career of options trading. Is that a daily, weekly, or monthly activity? What I do is one trade a month often none.

Options is clever, you can profit in up or down markets, I also know options traders who quit because it gobbled up their lives, you’re apparently always locked to the screen. Correct me if I’m wrong.

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@H200h Prove your last sentence with a long stretch of data and a chart please. Preferably from 2000-2022.

“Historical data has proven that premise invalid.”

Because basically you’re saying my chart is wrong but I can give you a URL with the portfolio visualizer pre-set to run the same dataset. You just “asserting” that my result is wrong, but offering no proof of your own is itself invalid.

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You’re correct. The hard part is to buy the option and leave it alone and avoid the temptation to trade it. The sole purpose is supposed to hedge. I don’t think there’s a true profit opportunity from options in the long term. You can have one or two home run trades but that is followed by dozens of losers

I believe ATM options lose money 70% of the time. Writing those options is just as risky because one large market upswing can offset dozens of covered call gains. You have a profit but would have had a larger profit had you not written options those dozens of times. On the contrary one option that expires worthless can be enormously valuable. Options are truly part of your overall portfolio and because they are zero sum should not be traded in isolation. Thus a worthless option may mean a much reduced loss

And you’ve spoken to the heart of why options trading is a bad idea: because they’re so volatile it is way too easy to churn those trades when they’re really meant for a specific purpose

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There are terabytes of historical data showing that market averages fare better than people-managed funds sourced in those same markets.

The reason is simple. To manage a fund, humans must guess what another human is going to do. Both are decisions fraught with countless biases and distractions brought about by the human condition.

People who engage in an activity are biased to believe, from the very beginning of their efforts, that they are on the correct course, otherwise they would not launch themselves into that activity. Many are fooled by the random occurrences of success or lack of failure. But the truth can be discovered by comparing their performance over time to choices made by a chimp and a dart board.

Reading list:
Daniel Kahneman - “Thinking, Fast and Slow”… and “Noise”
Nassim Taleb - “Fooled by Randfomness”

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I like your post. The best approach is 100% in index investing such as the S&P 500 index and Wilshire 5000. The S&P 600 and Russell 2000 as well as EFA or IXUS for international stocks

You are more likely to benefit more by staying in the market than you are by missing the market decline.

Options are a hybrid - you pay an insurance premium to avert an adverse outcome - a loss or missed profit. You only want to buy the amount of insurance you need. And what you need is the unleveraged value of cash you hold or the number of round lot shares you want to protect with a round lot = 100 shares per lot

That means options are to fill a short term problem. If you want to stay in the market but need the $$$ short term a put option insures against a market decline.

On the contrary, if you want to get out of the market to avert a downturn, a call option can hedge the risk of permanently losing out on the market upswing

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@H200h I agree that discretionary trading is fraught with peril, but what you wrote is irrelevant to my original post

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Your OP was titled “Alternatives to buy-and-hold investing: trading, but slowly (not day trading).” In it you explained a method that was somewhere between buy-and-hold and day-trading investment strategies. It was in fact a market-timing strategy augmented with a combination of mathematically-driven techniques, (10-month moving average method,) and subjective decision-making, (" I will keep a few because I think they are undervalued diamonds in the rough.")

I’m sure from your point of view you think that your method is nothing like what you refer to as “discretionary trading” but you are allowing your innate biases to color plain objective analysis of your ideas. The crux of your problem is the built-in fallacy of using a data source that is nothing more than a compilation of emotional human choices. That data source you refer to as the “10-month moving average” is not a thing disconnected from it’s source. It is simply a distillation of human-emotion driven decisions. Packaging those illogical decisions as a “moving 10-day average” does not change anything, you are still making a decision based on the frailties of the humans making those buy and sell decisions.

The only dependable non-human-decision-based market timing system that works is flash trading. It works because it does not pick stocks for gains, it picks transactions and inserts the flash trader between the buyer and seller like a classic middle-man agent, and profits by leveraging technology, not human emotion.