Volatility Assured, How to Handle the '11 Market

Jim Jubak MSN Money November 23, 2010

Amid the market's ups and downs, keep your eye on the long-term trend moving stocks upward. And should that trend break, prepare to run for cover.

Last week, in my Nov. 18 column, I sketched out a picture of a very volatile 2011 and said that today I'd take my best shot at a strategy for how to invest through the turbulence.

The Irish financial crisis

My strategy is based on taking advantage of that "most of the time" and staying alert for the exceptions.Markets love trends Most of the time, markets are in a trend. Look it up yourself on a chart of something as staid as the Standard & Poor's 500 Stock Index ($INX) or something as supposedly volatile as the iShares MSCI Emerging Markets Index (EEM, news, msgs).

If you graph the market's daily moves along with its 200-day moving average, you'll see that while the daily moves create a mountain range of jagged peaks and valleys, the smoothing average reveals a remarkably steady trend line.

So from March 2003 to December 2007, you'll see a 200-day moving average draw a very steady ascending slope. That's despite the big valleys caused by daily moves like those of March 2007, or the big peaks caused by daily moves like those of July 2007.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=7f5a5ab8-fcf3-461f-872f-6389fbfaab08,10bf45fd-5145-480d-aa24-122f74422432,37084173-20a0-4018-9dbc-5942ed03bb70,5807fbb2-b085-4941-9fe4-da6e37a7f10b,77d0d9b1-0efc-4abc-b33d-a591aa56dfa1,a93ca7c0-a9e6-40d5-8b38-1eabbbc3ce7d,90ad807b-b042-413c-81d2-38872047c91f,64ead0bc-da00-48bb-9447-184cf8293cdd,18b6dfe7-117c-4c90-90af-d825a5f682a3", "player.fr": "iv2_en-us_money_article_16x9-jubaksjournal-5-rules-for-the-wild-year-ahead"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=7f5a5ab8-fcf3-461f-872f-6389fbfaab08,10bf45fd-5145-480d-aa24-122f74422432,37084173-20a0-4018-9dbc-5942ed03bb70,5807fbb2-b085-4941-9fe4-da6e37a7f10b,77d0d9b1-0efc-4abc-b33d-a591aa56dfa1,a93ca7c0-a9e6-40d5-8b38-1eabbbc3ce7d,90ad807b-b042-413c-81d2-38872047c91f,64ead0bc-da00-48bb-9447-184cf8293cdd,18b6dfe7-117c-4c90-90af-d825a5f682a3;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Even though it tracks a very different set of markets than the S&P 500, you'll see the same pattern in the Emerging Markets Index. The exchange-traded fund tracks the index back to 2003, but from May 2003 to June 2008 you'll see a very steady upward trend in the 200-day moving average. That's despite peaks like the one in April 2006 and valleys like those in May and June of 2006.

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Long-term trends are your friends If you play around with these charts, a couple of really important investing truths pop out at you.

First, the longer your holding period is, the less important the volatility on the daily chart. Peaks and valleys fade into insignificance when you're looking at an upward-trending 200-day moving average from March 2003 to December 2007 or from May 2003 to June 2008.

This observation can easily get extended into something like the extreme form of what's called buy-and-hold investing, which argues that if your holding period is long enough, you need never sell stocks. You just hold on through any volatility.

Second, it's clear from looking at these charts that this extreme form of buy and hold isn't very good advice. And that's because these "most of the time" trends are punctuated by bouts of volatility that are big enough to completely reverse the 200-day or any other trend line.

The volatility from January 2008 through August 2009 (otherwise known as the global financial crisis or the bear market of 2007) decisively ended that March 2003-to-December 2007 upward trend. Same thing happened in the volatility that stretched from November 2000 to April 2003 (otherwise known as the tech bubble or the bear market of 2000).

Even if you draw a chart all the way back to 1950, you will see clearly these great trend-busting events. Some volatility is big enough to get your attention no matter how long your holding period.

Continued: The course through volatilityMore from MSN Money and MoneyShow.com

Get ready for a wild ride in 2011

Jubak on video: US stocks are your best bet now

Invest globally in domestic bliss

Howard Gold: Rather be rich than right

How to invest for the next bubble

Why in the long run, we'll be fine

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Connect with JimBecome a fan on FacebookSubscribe to his e-mail newsletterDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Articles by Jim JubakGet ready for a wild ride in 2011 11/18/2010Invest globally in domestic bliss 11/15/2010How to invest for the next bubble 11/11/2010More...Jim's Most Recent Top Stocks PostsBuying on the tech sector's weaknessIs China about to hit the brakes?It's not the earnings surprise that countsFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 2CommentsNewestOldestBestWorstControversialActive RIA2 hours ago

JJ was a confirmed "extreme" buy and hold proponent back in 2008, but since has embraced active investment management at the urging of myself and others. about time.

HOWEVER, he still lures investors into becoming day traders since that is how he makes money on his website, newsletter and blog (jubak's picks). the better (read simpler and wildly more lucrative) strategy is to simply get all of your equity allocation money in low with great fund managers, let it ride through the bull market, and then get it all out before the next bear market hits. these cycles are both recurrent and predictable by a professional broad-market timer who makes moves about only every four years. ignore this huge sea-change since 1999 at your own financial peril.

in this case, timing IS truly everything.

be careful out there.

0 0ReportSpamscammic5 hours ago I'm just wondering who are going to buy back from the buyers of those the big numbers of shares sold by the CEO's and traders later on in the game. Will their be a big bailout to save the 401k 's or is it gamblers beware rule roles? 0 0ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of ConductPlease use this form to notify the moderators. They will investigate your report and take appropriate action. 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