Two Mutual Fund “Buy and Hold” Alternatives

You’ve heard it before: Buy a mutual fund and hold it for the long term. Only problem is…that just doesn’t work so well anymore. Here are a couple simple, proven ways to beat “buy and hold” without spending thousands of dollars on a newsletter or paying huge fees to a stockbroker.

Alternative One – Use a Simple Trend Trading System

You’re probably thinking “Hey, wait a minute… isn’t that TIMING the market?” No it isn’t. Any investor who has been around for any period of time has heard the saying “The Trend is Your Friend” because it’s true. Remember Newton from high school physics class? “A body in motion tends to remain in motion.” Whether the market is going up or going down, it tends to continue in that direction for some period of time.

Try using the “Golden Cross/Death Cross” trends to guide you on when to get into and out of the market. Simply set up a 1-year chart with your chosen fund (Yahoo! Finance has one of the easiest-to-use charting systems and it’s free). Go to “technical indicators” and add a 50-day moving average and a 200-day moving average onto the chart (There is some debate as to whether the “simple” or “exponential” moving average is better, but either one will give SOME help).

When the 50-day average moves ABOVE the 200-day average, you just got a “golden cross” which is a signal to get into the market, or fund, or stock, or whatever it is you’re charting.

When the 50-day average moves BELOW the 200-day average, you just got a “death cross” which is a signal to get OUT!

Using this simple signal would have saved untold losses in the last downturn. Don’t believe it? See for yourself: Chart your biggest losing investment on the Yahoo! chart and see when you would have sold if you’d been using this system.

Alternative Two – Use a Stop-Loss

What is a stop-loss? A stop-loss is a predetermined order to sell when a stock, mutual fund, or just about any other investment drops a predetermined percentage. Initially, your stop-loss should be the amount you’re willing to lose on the investment. Here’s a hint: If you start with anything less than a 25% stop-loss then the chances are you’ll get “stopped out” and sell before the stock or fund has a chance to make any significant gains.

If your investment goes up, then you move the stop-loss up proportionately. Say you buy a fund at $10 per share. Your stop-loss would be $7.50, so if the fund dropped to this point… you sell. Say it’s a year later and the fund is at $14 a share (you picked a winner!). You would have moved your stop-loss up to $10.50, which means that you’ll do a little better than break even if your stop loss is hit.

Remember that with open-end mutual funds you typically can’t place a stop-loss order in advance, so it will be something you’ll have to track and place the order manually when or if the stop-loss level is hit.

Either one of these two simple tools would have eliminated most of those 30%, 40%, even 50%+ losses that people experienced in the last market downturn… and possibly even allowed many to preserve some of their mutual fund gains!