Wednesday August 3. Phew! Debt crisis, yuch… Nevertheless, I believe I found ways to do better with my investments

Wednesday August 3. Phew! Debt crisis, yuch… Nevertheless, I believe I found ways to do better with my investments than I have done in the past. It actually came about through sharing ideas through the email with my friends. I just try to continue with that. I am not an avid investor, but I realized that I am invested and that to do nothing is an illusion: doing nothing is doing something. Doing nothing just means not managing things. I used to believe in “buy-and-hold”, but I don’t any more. I invested in basic industry, i.e. large cap American companies by way of mutual funds and thought if I just held onto them, they would grow at the historical 10-11% of the past. But this is not the case anymore.

I have equities that have 0% total growth in the last ten years. I finally decided to get out of some of them. I have just been trying to explain here what I believe is a way to manage things better, at least for me. I was able to identify a high point in the market two weeks ago when the Dow hit 12,724. I felt, because of my analysis for 2011 that that would be a high point, and we should take advantage of it by selling anything that we might want to unload anyway. I was able to sell $15,500 worth of three large cap mutual funds and buy back into others when the Dow dropped. Comparing where I am now with where I would have been, I am better off by $1000. I believe some of the movement of the Dow is predictable. It has been for me. That is what I want to share with you.

The THEORY I am testing is this: If we can identify anything that is predictable with better than 50% accuracy, then we can design a market strategy to take advantage of it.

What I observed was incredibly simple: when the market is up, it will go back down, and when it is down, it will go back up. The market travels in bands that trend downwards and upwards, but upwards over the long term. Historic growth prior to this recession had been about 10% for equities. Now it's more like 7%. I'm not sure, but it's still up.

Dow Jones Industrial Average (^DJI) 1928 to present

Dow Jones Industrial Average (^DJI) past ten years

The obvious key to making money in any market is to buy when the prices are down and sell when they are up. In order to buy anything, you usually have to have some cash, which necessitates initiating the cycle by selling something. Hopefully you can sell at a good price and then buy back when the market takes one of its periodic downturns.

And the key to selling when it is up and buying when it is down is doing the opposite of what everyone else is doing: when everybody is saying buy, it's time to sell. And when everybody is saying sell, it's time to buy.

That's about it: the rest is mechanics. I started out using two of my mutual funds that are large enough that they move pretty much with the market. I sold $15,500 of the one fund when the Dow was in the 12,600-12,700 range and have been buying back into the other fund, beginning when it dropped into the 12,100 range.