Personal Finances Part 2 ... Investing , the Neglected Skillset by David Yeh , MD

Can we improve on our investment technique ?

( a mutual fund that invests in the 500 largest companies as ranked by Standard & Poor , in this example , ticker symbol VFINX ) has lost about 50 % twice in the last 16 years , each time taking years to recover . But what if there is a way to sidestep at least the larger bear markets like the markets of 2000 and 2007 ?

Figure 3 also shows a smoother curve , which is the 20 month Simple Moving Average ( SMA ): the line is nothing more than a plot of the average price of the last 20 months of the mutual fund . It ’ s very easy to calculate , and there are free websites that can calculate it for you . If you notice that when the mutual fund is above the 20 SMA line , the fund tends to go up . You ’ d also notice that when the fund is below the 20 SMA line , the fund tends to be dangerous and go down . If you check this 20 month SMA number once a month , no sooner and no later , and just get out of the stock mutual fund and switch to a bond mutual fund when the stock fund goes below the 20 SMA line , you might have gotten results as shown in Figure 4 .

Figure 3

Fear of losses is a difficult fear to overcome when investing , and rightly so ; we ’ ve seen that losses are larger than they seem . And fear only magnifies when real hard-earned money is in our investment account . After all , a 50 % drop means we have to make 100 % just to break even , and that can take years . In fact , Figure 3 illustrates how an S & P 500 index fund

In Figure 4 , the VFINX is the S & P 500 Index mutual fund , and the VUSTX is a Long Term Treasury bond fund . The thin smooth line is the 20 month SMA line . When the stock fund is above the 20 SMA line , we stay in the stock fund . When the stock fund is below the 20 SMA line , we sell the stock fund and move into the bond fund . When the stock fund goes above the 20 SMA line again , we sell the bond fund and buy the stock fund again . The result is the