Part of my investment philosophy is raising cash and sitting out during unhealthy markets. I’ve received several emails telling me “it’s impossible to time the market” and “you’re arrogant to claim you know when it’s unhealthy.” It’s not called arrogance, it’s called putting in the work, studying history, and having the confidence to act.
If you learn ONE thing from reading this article, I want it to be this: When the market is below its 200-day moving average, it means the market is unhealthy. That doesn’t mean sell everything and run, but it does mean get defensive and protect capital. Most financial advisors are passive and tell their clients to “sit tight and ride things out.” Screw that! I’m all about being proactive and preventing massive declines from happening. Basically, I don’t want what happened to all my parent’s friends in 2008-09 to happen to my clients now. Unfortunately, too many people lost 40-50% of their retirements from “riding things out” and not taking action. While I don’t think this correction will turn into a 2008 scenario, it still doesn’t hurt to be defensive.
If you don’t believe me about the 200-day, just listen to Paul Tudor Jones, one of the greatest money managers of all-time. Jones says “My metric for everything I look at is the 200-day moving average. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: How do I keep from losing everything? If you use the 200-day moving average rule, then you play defense and get out.”
I’m not trying to scare people, but bad things tend to happen when the market is below its 200-day. Of course, bad events happen all the time, but they tend to get exaggerated when the market is vulnerable technically. I think the market will continue to be very volatile over the near-term, and I still recommend caution in case this correction gets worse. I continue to maintain a very large cash position for my clients until market conditions improve.
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