Page 26 - DIY Investor Magazine - Issue 23

HOW DO MARKET CRASHES START?
The underlying reason is in the background and it triggers when something, or increasingly someone does or says something and the move starts; a bit like the start of World War One I suppose, a war of words with lots of huffing and puffing all kicked off when the first soldier got shot.
Presently we can see the tensions as economic power shifts to the east; over thirty years as China has risen, the US has fallen. President Trump decided to do battle with this trend, introducing tariffs on Chinese imports, sparking a trade war that simmers away in the background and every so often bursts into life, usually via Twitter, and the markets fall sharply.
The trade war is the underlying reason; whilst investors are well aware of it, they seem to shrug it off until the next Tweet comes out and then they knee jerk.
Is that logical? No, but it’s the way the market works, and we only know after the event, what actually started the move.
SO HOW DO I HANDLE THESE SITUATIONS?
I’m neither a newbie nor drawing down income from my investments; I’m still investing and building both my ISA and my SIPP from their returns and with new money in.
Even so, it’s very easy to get sucked in to doom and gloom as I watch my account going down in value and profits bleeding away in a crash happens; I don’t want
to come across as some cocky little tosser who always gets everything dead right - I don’t, but because I’m not one of those rare creatures with an instinctive feel for market direction, I’ve learnt the hard way to follow a strict set of rules.
When something I’m invested in starts falling sharply - an individual share, a fund or the general market - I do nothing, simple as that.
Nothing that is until one or more of the three sets of moving averages I use to guide me into and out of positions inverts, i.e. the shorter of the pair crosses down through the longer. Say the 10 day average crossing down through the 20.
When that happens, I begin to sell, scaling out of my holding; it requires nerve not to just dump the lot as everything in sight is flashing red, but it’s a simple and very clear system to follow.
This does mean that I give back a fair chunk of my profits when prices keep on falling as obviously, I don’t get out anywhere near the top, but getting out at the top can’t be done in real life, only with hindsight. The benefit however is that I don’t get tipped out of winning trades needlessly when a sharp down move quickly reverses as they often do.
Here’s a good example: Baillie Gifford American Fund fell over 20% to December 2018 but the 100 and 200 day moving averages kept my core position invested.
I would have scaled out of some of my position as the two sets of shorter moving averages I use inverted during the decline that started in October, but I didn’t get tipped out of the core position.
Once the market started going back up the shorter moving averages would have crossed back up and I’d have scaled back in to be 100% invested.
DIY Investor Magazine | Oct 2019 26