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Long-Term Investing Also Needs Good Entry And Exit Points

Jennifer Gordon

Investing in stocks, commodities, and even currencies involves many different and opposing styles, mixed with varying time frames to achieve each individual investor's goals and objectives.' The styles generally fall into two categories, either active management or passive management.' "Buy-and-Hold" strategies fall under the latter camp, which also includes "DRiP" investing, or Dividend Reinvestment Pans, as one of its proponents.' While the debate over which style is best has never been resolved, a wise investor, particularly one with long-term investment horizons, can learn and benefit from each style on his long and winding road to financial wealth.

The keys to success for any long-term investment strategy are proper asset allocation and diversification.' There may be tax reasons for selling a specific stock in your portfolio, your portfolio may be too heavy in one market sector, or it may just be time to "weed out the crabgrass".' Cultivation is a necessary activity at times, and you will, hopefully, always have new funds to invest on a recurring basis.' For all of these reasons and more, long-term investing at times can benefit from tools that signal good entry and exit points in the market.' These tools are commonly used in active management strategies, no more so than in foreign exchange trading, where free forex indicators are included in every broker's software trading platform.'

Annualized Total Return
This is not a discussion about the benefits of day-trading or active asset management. Every long-term investor is well acquainted with research on long-term returns for staying fully invested in the market.' The chart below is often used to drive home this point.

The returns shown here are for the "1996-2005" time period.' If you had been fully invested, your reward would have been 9.1% on average.' If you had been out of the market for whatever reason during the infrequent market "spurts", you would not have earned the same level of return and, in some cases, you could have lost money.

However, for those times when portfolio "cultivation" is in order, day-trading tools can help to discern proper entry and exit points for your stock transactions.' The benefits can be material.' Let's demonstrate by using the Microsoft chart below.

Example Microsoft Chart

Three of the most commonly used signal indicators are presented below the actual price data.' These are Slow Stochastics, Relative Strength Index (RSI), and Moving Average Convergence-Divergence (MACD).' Active traders will typically use a combination of indicators due to false signals that can be generated by market gyrations.' These indicators have upper and lower limits that signal overbought or oversold conditions, and where there are two lines, the points where they crossover can be significant.

The information gleaned from these tools are referred to as the "technicals" of the stock, whereas the "fundamentals" are typically the reasons behind the supply and demand forces that determine price movements in the upper region of the chart.' Both are important factors, but if the decision has already been made to invest in or sell Microsoft, then let's decide the best timing from the indicators.

A good entry or buying point was suggested in the week of February 8.' Stochastics and RSI hit lower boundaries and a crossover occurred in the MACD lines, thus confirming that an uptrend was imminent.' Microsoft stock then appreciated for an eleven-week stretch.' A weakness in the Stochastic indicator is observed.' This tool is good at signaling that a change is coming in a "ranging" market, but it does not work as well in a "trending" market.' To avoid this false signal, traders use the other two tools to guide their thinking.' Lastly, the "technicals" suggest that the market has corrected in the past few weeks, and that it may be a good time to invest in Microsoft again.' Before making a decision, one should check the stock's fundamentals.' Good or bad news may create forces that must be reconciled before acting.

If you are a long-term investor, why bother with short-term trading techniques?' The answer to that question is in the results of the examples that we cited above.' If you followed the signals and invested or sold accordingly, your financial benefit on the front end would have ranged from 14% to19%.' It may take a few years to recover these amounts, unless you were prudent at the outset.

The key premise of this discussion is that every long-term investor has choices to make that may benefit from short-term trading techniques.' The benefits of long-term investing are well documented.' Continued investment over a long period of time spreads out risk, improves dollar-averaging, and achieves a multiplier effect that can only happen if you are in the market.' For those few times when entry or exit are important, profit from the advice above, but only after reviewing the fundamentals with your broker.