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I have an ETF portfolio (MSCI World, Euro Stoxx 600) and I'm following a "buy and hold" strategy.

But I would also like to learn more about risk management strategies. More precisely, I'd like to learn about indicators for sell signals because it might make sense to sell some (or all?) shares if there are strong indicators for a crash.

What I have learned so far:

  • I can use moving averages (e.g. for 20, 50 or 200 days) for my sell signals
  • I know that I have to factor in fees and taxes
  • I know that those indicators are not perfectly reliable
  • I am currently writing software to backtest those strategies

If you use such strategies, how do they look like and which sell signals do you use?

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    Elliot wave is another system some use and may produce better results but is more complex and less followed. I'd recommend reading this guy (pretzelcharts.com) and follow Avi Gilburt at seeking alpha. They both cover the S&P 500 and will give you an idea of where it's expected to go over short, medium, and long time frames. For free advice, the pretzel blog has been uncannily accurate over the past year, being ultra bearish just prior to the December '18 meltdown – public wireless Apr 6 at 1:16
  • @publicwireless thanks for the comment! – cruppstahl Apr 6 at 20:04
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“There are no magic numbers in trend following", written by Norman Fosback wayyy back when. Moving averages (MA) are just lines on a chart based on arbitrarily chosen numbers.

The longer the MA, the less noise and the fewer the number of whipsaws. In return for that benefit, your trade execution will be late and by the time you act, your position may have suffered a sizable loss. A shorter MA will be more sensitive to slight price changes and you'll have a more timely exit. Neither MA length contributes anything toward determining whether price reversal will be small (and then reverse and continue trending upward) or if the downward move will snowball.

Using a moving average as an exit strategy is very similar to using a stop loss order with the difference being that a stop loss order is in the price domain in dollars whereas an exit based on moving averages is based on a derivative of price. Since the MA a derivative, the size of your stop will vary because the distance of current price to the MA is a function of the rate at which past price been changing.

Backtesting this strategy will tell you what has worked in the past (it's curve fitting). Past performance is no guarantee of future. results. The success of any moving average crossover systems is dependent on selecting the right periodicity and that is only known in hindsight.

AFAIC, price is your best indicator. Use trailing stops. If you're concerned about price gaps or 'crashes', you can use options which were designed for the purpose of insurance. Which option strategy is best depends on what your risk tolerance and goals are.

  • Thanks for your comment. How do you set the trailing stop? 3%? 5%? Is that based on gut's feeling? – cruppstahl Mar 24 at 19:59
  • Determine how much of a profit you are willing to give up or how much of a loss you are willing to take. Set the stop loss there. – Bob Baerker Mar 24 at 21:26
  • Isn't a stop-loss contrary to a buy and hold strategy ? – xyious Mar 26 at 17:19
  • Yep, you caught that. The OP wants to be Buy & Hold but get out before the carnage. Sometimes, getting out is better than Buy & Hope :->) – Bob Baerker Mar 26 at 17:23
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Buy and hold is actually a terrible strategy, generally speaking for the average investor.

The main and most famous proponent of Buy and Hold is probably Warren Buffett. But he doesn't just advocate buy and hold.. He also advocates careful and deep research, before making that said "buy and hold" investment. Even then, among his investments only a few are truly "hold till death"

So without understanding the other components to buy and hold... blind buy and hold (which is what most people do) is a terrible strategy.

And I find with research the focus should be to understand one's investment thesis and the fundamental justifications for your decision to buy. And should the thesis and fundamentals change, you should consider sell...

  • I'm not confident enough that I can set up such fundamental justifications, especially for indices like MSCI World or S&P 500. It's really more about "getting out of the market before the carnage", as @Bob Baerker wrote. – cruppstahl Apr 6 at 20:03
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    @cruppstahl: those are really Macro indexes. I actually made a fortuitous call, in 2007 and got out of stock into precious metals. I was at a ski trip with some friends, and we got talking about securitization of mortgages. And when we got to tranches, I was told that AAA mortgage tranches pay 75 to 100 basis points or more that AAA treasury (meaning, people intuitively knew that sub-prime mortgage AAA tranches aren't actually AAA, and got a premium for it). I knew how big that market was. that was when I knew the whole thing was built on quick sand. Sold everything the next day. – sofa general Apr 8 at 14:11

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