Sauros could advise your Grand Ma

A former colleague of mine in the Rat Race, ("Hey man keep on running, I'm sure if you work hard enough they'll give you a billion bonus"), a CFA, speaks like in the personal finance books and use "standard" arguments when it comes to investments and savings. Every time we happened to discuss about these, I felt like I spoke with the financial advisor of my grand ma. One of his commonly shared arguments to buy stock is that "in a 10-year period, stocks are ALWAYS profitable"... Of course, as good "Back Traders", we know that's not true, I did the maths quickly this morning : if you invested 100% of your capital on Jan 1st 2000 on the S&P 500 (SPX), you'd have lost almost a quarter of it on Jan 1st 2010 (or today as the stocks are today almost flat for the year) or if you "pound cost averaged" and invested 10% of your equity every year on the SPX you would be today roughly at a 5% loss. Not really convincing ...

Now, interestingly enough, if you invested on Jan 1st 2000 but you managed to stay out of the market the worst year of the decade (2008), your profit would be of +23% (2% per year), if you managed to avoid the worst 2 years (2008 and 2002), you would have returned +61% (5% per year). Nothing amazing there but still better.

So if I had to advise my grand ma on stocks investment I would say

- "Pound cost averaging", meaning investing the same amount of money on a regular basis, makes sense : actually it is a mix of averaging down the stock (grrrrrr) and pyramiding it (yeah...). While it's highly advertised by your financial advisors as it's a good way for them to take fees from you on a regular basis, the historical back tests, particularly in periods of turbulence, generally better results than if you invested one off.

- Grand ma, you should spend your time monitoring the markets, following the whole day the prices action, the night the futures and try to time it : try to get out before it goes down and get in before it goes up. The trouble is that bad timing can kill your performance if you miss the few trading days that builds your performance.

Well, maybe my second piece of advise is not very appropriate for my grand ma, but roughly that's the way I try to do it. I managed to get totally out of the stock markets in early 2008 (a week or so before Kerviel), thanks to the Lord of Trading and I started to go back in on a pound-cost average basis since early 2009. In early 2010, I switched my holdings to SJP Far East Fund investing in Asia (including Japan), and I got out and went for cash end of June. The reasons for this is first, I was considering that the risk of the global Economy fell in a double dip was high (looks like I was wrong on this) and secondly as the FTSE Asia-Pacific index, the benchmark of the Far East Fund broke its 200-SMA. For this type of investment, I consider basic technical analysis set-ups will just work fine, for instance : "buy above the 200-SMA and sell below"

The question of the day is whether I should come back to the Far East or not? Well maybe. I will stick to the 200-SMA strategy applied to the FTSE Asia-Pacific (in GBP while the index is quoted in USD) as it's testing now its 200 and 50 SMA and wait to see if the S&P 500 manages to break its own 200-SMA too, the US stocks rules the world's stocks...

So the action is once again : wait and see. Wait ans See on the short term swings, wait and see on the longer term investments, you can easily imagine how my days are boring ... ;)

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FYI As this post is published: SPX 1114 // SX5E 2767 // NKY 9753 // DAX : 6176 // EURUSD 1.2987 // USDJPY 87.68 // XAUUSD : 1159