Using Charts to Save Your Retirement

Ask any 50+ year old if they would like to go back in time and buy back ten years in the stock market through either age or side-stepping the 2000-2002 or 2007-2009 market downturns, and they’ll likely say yes. The below points will show you how to prepare for the next time that this happens using charts.

Overview and Facts

  1. Your retirement account is likely composed of mutual funds
  2. Mutual funds have stock symbols where you can see the daily quote/performance
  3. These stock symbols also have price charts attached to them, which collate the investor action, within them
  4. Institutions are in the business of keeping your money under management, collecting off of you (daily) fees and expenses
  5. These institutions produce marketing material and myths to reinforce #4, so you don’t jump around with your money (for various reasons), and so you keep your money with them and under their roof for continuous fee reaping, even charging you excessive trading fees to dissuade you from doing what you want to do with your own money
  6. When the music stops and the market caves in again, they won’t be there to help you, rather they offer you more of #5 to appease you and keep you in check, leaving you still holding the bag as the market drops; you are on your own
  7. The older you are, the less “opportunities for recovery” there are for you in the market in getting your retirement portfolio back to even after every big drop (never mind growing it)
  8. Most major asset management institutions are “long-only” entities, meaning they invest with the assumption that things always go up in the long-term. Most of their products are geared towards that direction and time frame. Their prospectus mandated defensive measures usually amount to just raising cash or promoting diversification when things get bad. They are rarely able to protect you on the downside. Only you can do that.
  9. Using basic technical analysis charting tools can save your retirement

What you Need to Know & What They Don’t Want you to Know

There are several old adages on Wall Street that are often used and defended by the big institutions that custody your money, with, believe it or not, your well-being as an investor not their primary priority. Buy and hold,“time in the Market, not timing,” dollar cost averaging, and diversification, are a few of them. Some have merit in their own right, but these, and others, are hammered home into the mind’s of investor’s in literature and educational and marketing pieces to keep them/you fully invested in your account at all times so as to not disrupt their fee structures if you moved about the cabin.  These institutions collect daily management fees off of your Assets Under Management (AUM) and that is how they make their money.  Most also, assume that every investor has a very long-term time horizon (that’s what they tout, right?) and can weather market dip after dip. This is not always the case with those that are closer to (or in) retirement, that still have big time equity exposure.

They Don’t Like you Trading

Hampering your desire to trade is a way for them to avoid asset shift within their funds on a daily and weekly basis. Portfolio managers count on minimal movement, turnover, and asset stability within their funds to make their daily moves and trading decisions. Portfolio manager instructions filter down to their traders to buy or sell stock, and the last thing they want to see (trust me because I lived it), is a note on their desk telling them that there are major redemptions on the books for the end of the day from Schwab and Fidelity. In bad markets, they are often forced to sell off investments to meet investor redemptions. This often accelerates market sell-offs, applying even more downward pressure to heavily weighted stock holdings they need to prune, many of which are also held en masse by competitor institutions. Thus, you can see the domino effect in the top weighted S&P 500 stocks that add performance on the way up, and add sell-off accelerant on the way down.

Most institutions realize that investors will switch in and out of funds as part of the lifetime investing plan, or from getting spooked, or from listening to their neighbor. So they usually offer products that compete with one another to keep your money in-house and give you the word “diversify”. For example, you are in equity (stock) mutual fund XYZ and are thinking that the market is frothy, so you want to sell out. The institution has a choice to  allow you to sell and move the money out of their firm or keep it within, by offering you a money market fund alternative (essentially a cash account option), where the money isn’t invested, but rather still kept under their umbrella while still generating fees and expenses for them. They continue to custody your money, collecting their beeps (basis points)  by charging you for being in the money market as well. They kept you under their roof and kept your assets under management. Fee structure intact!

They are Not Your Friend

What most investors must come to realize if they haven’t already realized it from past mistakes, is that the above points and adages also preclude your friendly representative from giving you advice on what to do when the market heads south in a big way, which is also usually when you need it the most! They’re typically not licensed to give you advice. Most are just salespeople and phone reps that are order takers. They won’t suggest you sell out or sidestep the coming bear market, rather, they will always attempt to steer you to stay in your mutual funds, or stocks, using #5 above as rationale using the traditional talking points. If you doubt this, try it out. Call them up and tell them you are concerned with how the market is doing, and see what they say. In the end, you will realize that you are on your own. They will talk you off of the ledge using only the tools that they have been given from the sales desk, and nothing quite a like a great financial professional advisor or financial planner who is market savvy, could give you.

Enter Charts

Most investors have retirement savings in IRAs or workplace plans like a 401k, 403b, etc. Within these plans we typically have mutual funds. Each mutual fund unbeknownst to many, has a symbol attached to it, where you can get daily quotes and also see that chart of it. The chart is representative of the collective holdings within that fund, calculated on a daily basis at the end of the day in a Net Asset Value (NAV); the fund’s assets minus the liabilities (daily fees and expenses, etc.) = your final price.

It behooves investors to keep an eye on not only the long-term performance of their funds relative to the S&P 500, but their peer groups as well. Most importantly though, is keeping an eye on the charts, and learning a little about basic trendlines and moving averages, that can then be applied to your funds to see how they are “trending,” positively, or negatively, and acting upon the “visual” when the mutual funds break trend and the investment’s “behavior” (that off the investors in each of the stocks that make UP the composition of your mutual fund), changes. This isn’t rocket science, and there are many sites that will allow you to plot your mutual funds to see how they are trending. A bad picture and a little common sense can help you side-step major long-term headaches and protect your nest egg!

Chart of S&P 500 from 2007 to 2009

Below is a basic depiction of the S&P 500 index fund, which is the benchmark for most mutual funds out there, and what most mutual fund managers peg their performance to and try to beat year in and year out (most fail). As you can see, a basic trendline connecting the lows from 2003-2008 created a nice and steady upward line, around which the price of the index zigged and zagged. This behavior remained consistent until the end of 2007, when market movement started getting erratic. The price chart of the index broke trend, and investors (most the institutions that control the big money) began to run for the exits, making the fall even worse.  This break in trend was a big red flag that all investors could have seen and taken some money off of the table.

SPX 2007-2009

Below you see the 200-day simple moving average added to the chart. The action of this was another confirming indicator that things were bad. Not only was it sagging and moving lower, but the slope was downward. By thinking of the S&P 500 as a super tanker, it takes a long time to turn lower. That is, changing the direction of 500+ stocks from upwards to downwards takes a lot of effort. So when it does, it is usually very meaningful.

200-day Moving Average Added

SPX 2007-2009 w 200 sma

As can be seen, the price of the S&P 500 did not recover and reclaim the 200-day line until July 2009. Using this longer-term MA along with the trendline is a powerful tool for knowing when the broader market is not trending in the favor of the investor. This will impact your retirement, and why you should spend a little time learning more about charting and technical analysis, and avoiding long-term investment marking slogans and jargon. This is, after all, your hard earned money!

Some Resources and Links:

Very good, simple and affordable book on charting Chart School

Drawing Trendlines (basic)

John Murphy’s Blog (paid) – could save you big time though!

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