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A Beginners Guide to Buy Low, Sell High

“Buy low, and sell high”, is foundational advice often given to beginning investors in order to avoid losses and lock in gains. In an attempt to reach that goal, a portfolio manager often draws from the discipline of technical analysis which at its core, focuses on the effects of buying and selling pressures on assets such as stocks, bonds and commodities. Technical analysis is often contrasted against fundamental analysis which focuses on gauging the financial health of a specific company or industry. The two can also be blended, introducing an additional discipline, economic analysis. This post will explore the technical analysis discipline which is diverse. However, most technical analysis tools can be separated into either trend following or mean reversion categories.

Understanding how markets move

Markets have two states of movement, either trending up/down or rangebound. A portfolio manager must first use indicators specific to identifying the two states of movement. Think of these technical analysis indicators as tools. Having the right tools for the job plays a significant role in the success of the overall investment process. Like using a hammer to drive a nail or a shovel to dig a hole versus using the shovel to drive a nail and the hammer to dig a hole. Once an environment is identified, more specific indicators and methods can be used which may reveal further information about the environment.

Indicators of market movements

Indicators are available to detect various traits of price movement. If “Point Z” is higher than “Point A”, then an uptrend may be present (though what happened in between could play a role in the investment decision). Trends may be steady or could be choppy. Even within a choppy uptrend, it may have various degrees of width in the swings. Indicators exist that simply define a trend as being positive or negative and tools exist that define the level of volatility within the trend. Rate of change indicators can identify the percentage movement over a specified time period in order to identify trend. These indicators also display momentum or if the trend is speeding up or slowing down. Why does all this information matter? The more informed you are as to what is going on with a market environment the better equipped you may be to make risk-adjusted decisions for your portfolio.

Moving Averages

Moving averages (displayed below) are popular ways to identify trends because chart readers can easily see if the asset is above the moving average or below. If the asset is above the moving average the trend can be defined as an “uptrend”. If the asset is below, it can be labeled as a downtrend. The number of days used to calculate the moving average can vary in order to detect trends of various time frames such as shorter-term, intermediate or longer-term.

200 day — Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

Mean Reversion

The “buy low and sell high” concept can also be conveyed through mean reversion methods. In case that term is new to you, mean reversion simply means the movement is stretched, gone further than it typically does, and may soon snap back. “Overbought” and “oversold” are common terms associated with mean reversion methods. If a stock is in a trading range, by definition, it reaches an upper point, or extreme and then goes down toward a mean or average. It may then overshoot and go to a lower extreme, becoming oversold and then revert back higher. This process may be repeated numerous times. Trading ranges may be after an uptrend or downtrend has slowed. These may lead to a full reversal in overall direction or the trend may eventually resume but at a different slope. Once a trading range is identified, a portfolio manager must then be able to identify what constitutes the extremes or overbought and oversold zones. Tools of the trade may include Stochastics, Money Flow Index, and RSI, among others (pictured below).

RSI Money Flow — Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

Volatility Analysis

Tying the states of trending and trading ranges together may also involve volatility analysis. If volatility is high enough a trend may be observed and at the same time, upper and lower extremes can too. These are often referred to as trend channels (see below). Modest adjustments to exposure are often the goal when trend channels are identified such as the adding of positions around the lower channel line or “profit-taking” near the upper channel line.

Trend Channel — Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

Why does this matter?

Many investors take a hands-off approach to investing but that puts hard-earned money at the whims of the changing trends, and some bear market trends can be devastating. Active portfolio management, by way of technical analysis, often includes implementation of the tools discussed above. These tools detect periods of trending or trading ranges. Refinements with more specific trading tools and methods within those periods can further increase odds of potential success in navigating the unknown waters yet to be seen. This comprehensive approach to investing is used in Spectrum’s management for its clients.

Annualized Returns & Realistic Expectations

By Robert Harmon, Investor Services

On March 12, 2019

In News you can use

Most investors at or in retirement need to know how long their portfolios will last when they start withdrawing for income. They know what their monthly living expenses are and how much social security comes in every month. By using an annualized rate of return, retirees can calculate how much money they can withdraw each month from investments to help cover the expenses lacking from social security and any other supplemental source of income they may have.

Younger investors can use annualized returns to help plan their future retirement nest-egg. With an annualized return plugged into the equation, you can easily calculate how much you need to contribute monthly to “have one million dollars when I’m 65.”

“On the first day of every week, each of you is to put something aside and store it up, as he may prosper, so that there will be no collecting when I come.” 1 Corinthians 16:2 English Standard Version

Generally, most sectors of the stock market were down last year. If you owned Advanced Micro Devices, Chipotle, Under Armour or Etsy last year, good for you. Goldman Sachs, IBM, General Electric or Bitcoin? Oops! Many investors saw their portfolios fall 1-15% last year, some even more. That wasn’t in line with the return they were “expecting” based on 5-6% annualized returns the stock market has seen over the last 20 years.

Let’s take a closer look at expectations for earning a 5-6% annualized return on a year-by-year basis. Below are two hypothetical data tables showing the yearly data for calculating the annualized returns shown at the bottom of each table. Table A shows annualized returns for 11 years (2008-2018), table B shows 10 years (2009-2018) of data.

TABLE A TABLE B
Year	Return	Year	Return
2008	-17.23%
2009	31.25%	2009	31.25%
2010	11.21%	2010	11.21%
2011	2.41%	2011	2.41%
2012	14.78%	2012	14.78%
2013	11.10%	2013	11.10%
2014	7.98%	2014	7.98%
2015	-2.15%	2015	-2.15%
2016	12.11%	2016	12.11%
2017	4.19%	2017	4.19%
2018	-2.45%	2018	-2.45%
11 Year Annualized return:	6.00%	10 Year Annualized return:	8.66%

The annual returns above are arbitrary, shown to give you an idea how returns have, can and will continue to fluctuate in the future. In Table A, you may notice that there was not one year with a return of 6%. In fact, there were three years of negative returns. Annualized returns are averages that include compounding annual returns over a given period (in this case 10 and 11 years). Investors should expect to see years of returns greater than 6% and years that make less than 6% – and in some years, losses.

Table B shows the same returns, minus 2008 (the last major bear market). By not including the 2008 bear market, the annualized return jumps an additional 2.66%. The lesson here is to make sure you have as much data as possible when looking at historical returns. It is ideal to see returns for a full market cycle (bull and bear market). Looking at returns through a full cycle will do three things: one, prepare you for bear markets, two, give you a better idea of what to expect about long term annualized rates of return when planning for retirement and three, be very realistic on your time horizon.

Back to retirement. Retiree A wants to preserve capital and withdraw the gains over time on a systematic monthly plan. She looks at the annualized returns of 6% over a full market cycle and decides to withdraw 5% every year, knowing there will be annual fluctuations but that over time her principal should be intact.

Retiree B wants to do the same as Retiree A above, but he reviews data from Table B and decides to withdraw 8.5% each year. Because Retiree B is not looking at data covering a full market cycle, he more than likely will dip into principal over time.

Annualized returns can and should be reevaluated periodically to keep client expectations intact. If future returns are consistently less than past performance, adjustments may be needed.

The S&P 500 has annualized 11.29% over the last 70 years (12/31/1948-12/31/2018). But the annualized return over the last 20 years (12/31/1998-12/31/2018) is 5.61%. ¹

An investor with 10+ years to go before retirement may need to contribute more money annually and/or rebalance his/her portfolio more aggressively. For investors in retirement, they may have no choice but to start withdrawing less money until markets show signs of improvement.

At Spectrum Financial we evaluate client portfolios at least annually to ensure goals are being met, however, our Investment Team monitors the portfolios on a daily basis. We let clients know the various options available to them so they can stay on track. Annualized returns are an important part of helping clients reach their goals but are only a part of the equation. Please call our office to discuss this topic in more detail for your specific retirement goals.

^{1 Bloomberg data}

A Beginner’s Guide to Buy Low, Sell High

Annualized Returns & Realistic Expectations