September 23, 2008 at 2:00 pm by Tom Lydon
As the markets and exchange traded funds (ETFs) see-saw - up 300 points there, down 500 points there - you can’t blame investors for questioning what those good days really mean.
The Dow Jones Industrial Average closed last week with a huge two-day rally during which it gained 700 points. But investors rightly paused. Was the crisis over? Or was this just a dead cat bounce?
Monday, the Dow sank another 370 points. What today or tomorrow or next week will bring, nobody knows.
That’s exactly why you need a strategy and a plan.
Investors who are exposed heavily to risk and are choosing to ride out this storm might want to consider our plan. The strategy we follow if we’re in a fund is to exit either when it drops below its 200-day moving average or 8% off its recent high.
While you might lose some in this strategy, you will still manage to protect yourself on the downside and perhaps save a few dollars on Tums.
We cover our strategy in more detail in a trend-following plan story we wrote earlier this year.
This strategy is also covered at length in our book, iMoney: Profitable ETF Strategies for Every Investor.
Tags: Dow Jones Industrial Average
Share: 
Digg | 
Bookmark at Del.icio.us | 
Subscribe to our RSS Feed
September 23rd, 2008 at 9:41 pm
How would this work if the dollar makes a drastic fall? Cashing out of domestic stocks and bonds and into dollar money market funds wouldn’t do much help… Would you have the same strategy if the dollar fell 8%? Would I immediately move my money into foreign currencies?
September 24th, 2008 at 7:37 am
The strategy can be applied across the board. No matter what, if there’s an 8% drop, we employ the exit strategy to protect from further losses.
The cash is then a free agent, and it can be moved into other areas that are above their trend lines (whether it’s foreign currencies or something else entirely). If there are no such areas, we sit tight and wait until there are.