Actively Managed ETF Portfolio

So in my previous blog, 2/28/2009, I discussed the selection of a balanced ETF portfolio. I also mentioned how the buy and hold investor (Investor A) had went whole-heartedly into the market at the closing prices of 2/27/2009 with an investment of about $10,000. Now we move on to Investor B who thinks he is knowledgeable enough to actively manage his portfolio. So what will Investor B's ETF trading strategy be? Investor B has selected a 50 day moving average vs. a 200 day moving average ETF trading system.

To explain this strategy further I found a nice write up on wallstreetsurvivor.com. To paraphrase from this site:

The 50 and 200 day moving average crossover concept is simple. When the 50 day moving average of a stock (in this case ETF) crosses above the 200 day moving average it is considered a buy signal. If the 50 day moving average crosses below the 200 day moving average it is considered a sell signal. This is a longer term strategy that helps keep investors in the market during bull rallies, even when price does the inevitable retrace but gets investors out if there is a more serious market correction.

The site also goes on to explain about being careful about whipsaw (side-ways) markets. What will happen here is unprofitable buy and sell signals where you are getting in and out of the market more often. You can read the full post from wallstreetsurvivor.com here.

The ETF Trends website (etftrends.com) has a nice ETF Analyzer that plots both the 50 and 200 day moving average as the default when you type in an ETF symbol. You can see it here.

So Investor B checked out the 10 ETFs listed in the previous blog post on this site and only 2 had the 50 day moving average above the 200 day moving average, iShares Lehman Aggregate (AGG) and the iShares Lehman 1-3 Year Credit Bond Fund (CSJ). Not surprisingly, the other 8 funds were in a downward movement. As a result, Investor B put 10% into AGG and 5% into CSJ of his $10,000 and kept the rest of his money in a money market fund in a defensive position.

As I mentioned in a previous post, Investor's A and B are common Joe's like you and me and have full-time jobs. As a result, Investor B will only be looking at moving averages once week to see when to get in and/or out of any of his 10 ETFs from his balanced portfolio. Investor A on the other hand will check his results weekly but because he is a buy and hold investor, will not be making any adjustments to his portfolio.

I'll try and report the progress of the buy and hold vs. actively managed balanced ETF portfolio experiment on a weekly basis. I'm also planning on a newsletter update if you are interested. You can sign up at http://www.etf-newsletter.com/free_etf_newsletter.html. And so the experiment begins…