When to be Fully Invested

This stock trading question asking about when to be fully invested comes from Jim H. who asks….

“I never know when to commit to being fully invested.”

Let’s start with the foundation for success: you want to be fully invested when the market is rising, and less invested, or in cash, when the market is falling. During the GFC many investors did the opposite; they remained invested most of the way down feeling sick and stressed along the way. Having suffered such huge losses they were then too scared to get involved again during 2009 when the market reversed strongly.

The average investor can beat the broader market benchmarks by not being involved in sustained downtrends. We can simulate this with a basic moving average strategy: add a 50-week moving average to the ASX-200 ETF (STW), and buy when prices close above the moving average, then exit when prices falls below.

Buy and Hold = 50.6% return with a maximum drawdown of 55.7%
STW Strategy = 103.3% return with a maximum drawdown of 22%.

This simple method not only produces twice the return but does so with half the risk. (Interestingly enough the strategy only endured a loss of 12.4% during the GFC. The largest drawdown was caused by the back and forth chop in the market during 2011/12).

In summary you need to be committed with 100% of capital when prices are rising.