Much of this site is written for the agile trader or hedge fund like vehicle or trading. But just as I believe there is an intelligent approach combining pivots, other technicals, valuation, sentiment and timing to shorter duration moves of 1 week to 3+ months, there is a way to properly position long term beyond simply allocate and hold.
I will have more to say about this in coming posts but here are the basics of my theory.
The main point is to maintain exposure and avoid a deep drawdown. While we immediately think of 2008 and perhaps the tech crash of 2000-02, there have been several such moves this decade. XLE got sliced in half from 2014 top to 2016 low; this dragged down EEM and other names like EWZ as well. EEM is having a great year but it was painful especially from 2015 Q2 to the 2016 lows with about -35% drop.
GLD had a phenomenal run for many years, but if you didn't change your mind in 2013 then you may have seen a -40% decline before recovering some losses.
And these moves aren't just commodities. Biotechs via XBI also dropped about -45% from highs in a mostly similar span, from 2015 Q3 to early 2016 lows. China via FXI wasn't really down due to oil yet it too dropped about -45% from 2015 highs to 2016 lows.
When markets are up, the trends will take care of themselves. It is more important to avoid a big drop than to try to top tick strength and re-enter. Of course I do a lot of top ticking here on this site so you want to do that by all means but it isn't really long term investing where ideal holding period is 1 year plus.
Oh yes the taxation issue. That complicates matters for taxable accounts but the solution there could be inverse ETF or options.
Back to the principle - large drawdowns are avoided using a few simple guides. The weekly 50 moving average and its slope, and the yearly pivot (YP for short).
But it is very important that we use total return when doing this, and the only site that I am aware of to make this easy is stockcharts.com. The problem with stockcharts is their historical data but still this method will be good enough to review key holdings once in a while (once a month, once a quarter) to see if you are 'holding the bag' on something that is turning into real trouble. If an asset is getting close to a decision then you may want to monitor more often.
Above or below YP? Above YP, OK to hold. Below YP, consider underweight, hedge or exit.
Above or below W50MA? Above W50MA, OK to hold. Below W50MA, consider underweight, hedge or exit.
W50MA slope rising or falling? If slope rising, OK to hold. If slope falling, consider underweight, hedge or exit.
Positive change of status? Ie move from below YP to above? From below W50MA to above? Consider allocating capital.
If all three criteria are positive then there isn't much to think about except if you want to overweight that asset. Occasionally there will be a mixed condition like above the YP, below the W50MA with a flat slope. But if the asset is below its YP and below a falling W50MA, then that is serious trouble and best to just get out of the way in whatever method makes sense for your account.
I don't have a backtest on this and there can be some chop, like EEM 2012-15 had a few ins and outs before getting out of the way of the big drop and then getting back in on the big rally.
Anyway, here's the idea:
Go to stockcharts.com (free version fine for this purpose unless you want to start saving portfolios).
Pull up any asset; the default here is total return.
Select weekly on the pulldown, then update.
Remove Simple Moving Average 200 in the Overlay section at the bottom, and replace with "Pivot Points."
The weekly chart view uses yearly pivots only.
Then perform analysis as above.
Obviously most asset classes are up. This post has gone on long enough so I'll keep an eye on things and post again into year end. Stocks are not likely to change status anytime soon - but bonds might be something to watch, especially the long duration TLT.