SFO Magazine article on the 200-day moving average for investing

SFO (Stocks, Futures and Options) Magazine has an article from Tom Lydon titled "Take Control of Your Trading." Tom discusses the 200-day moving average rule of investing. Readers of this blog know that the ETF Newsletter website uses a 50-day/200-day moving average to manage one of its hypothetical ETF portfolios.

Here is an excerpt from the article:

"Following the global economic crisis, the buy-and-hold armor is severely dented. Investing pioneers Benjamin Graham, Warren Buffett and Burton Malkiel have spread the virtues of this strategy for years, but the truth is that most investors who followed the strategy are in the red for this century.

Even Warren Buffett is reported to have lost nearly $16 billion last year alone. True, this does not reflect the losses of the average investor, but it shows how detrimental this strategy can be in times of crisis.

The bottom line is that buy-and-hold has not worked. Those planning for or in retirement may have lost the money on which they counted for their future and now must postpone retirement and continue to work. It is a sad and terrible situation for anyone, and it is even more unfortunate when you consider that it could have been avoided altogether."

Another excerpt:

"Two simple sentences explain the rules of investing using the 200-day moving average:

1. When a position moves above its 200-day moving average, it is a buy signal.

2. When a position moves below its 200-day moving average, it is a sell signal.

Using the 200-day moving average can save your portfolio in several ways. Consider the following situations.

Say you purchased the United States Oil Fund (USO) sometime in November 2007. From that point, you would have likely enjoyed a long run-up until oil hit its all-time record price of $147.27 in July 2008. No one knew then that oil prices had peaked. But the decline was beginning (see Figure 2).

From SFO Magazine: www.sfomag.com/images/charts/122009/Lydon_Fig2.jpg

By September 2008, USO had dropped below its 200-day moving average, giving investors a choice: stay in or get out. Like many other investors, you talked yourself into hanging on, believing that oil would come back. After all, you and USO had been through so much together. You could not just cast it aside as though it never meant anything.

Oil plummeted straight to the bottom, and it was a jarring ride. Had you employed a 200-day moving average strategy, you would have sold the fund in September and avoided a majority of the losses that were yet to come."

Please read the complete SFO Magazine article here: www.sfomag.com/article.aspx?ID=1433