Morningstar ratings do not help you
to decide when to sell
index mutual funds
Technical stock market analysis do
Morningstar ratings is quite popular tool used by buy and hold investors into mutual funds. Their star rating allows a lot of investors to move responsibility for preselection of good and bad options. Buy and hold investors often do not want to take time to study what they buy.But what are morningstar ratings about ? It is rating system created by Morningstar Inc. that ranks mutual funds based on their risk-adjusted performance over various periods. 5 stars is best, 1 star is worst.
Morningstar ratings is about past performance
As you can see morningstar ratings is something about past performance. But almost every document about investing can tell you the basic truth you must understand in investing process:PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS Most of buy and hold investors want to invest only into products that that have four- or five-star ratings from investment researcher Morningstar. They believe that this research guarantee them quality and future results. But there is one hidden rule about mutual funds. They do not make money in bear market. They are long only funds that are almost totally invested all the times. They often compare their results to some benchmark - i.e. to some index like SP500. So if SP500 is down more then 20% and any fund is down only 15% , they tell to investors - "we are winner, it is success". But they are losing money !!! Do investors really want to invest this way ?
Be more active in buying and selling
index mutual funds
I advocate for being more active investor. As any one can see from
historical stock charts,
it is really possible that a lot of investors do not make any money with buy-and-hold long time investing. Todays markets and economic situation is much more uncertain. It is quite impossible to predict what is going to happen in more then 1 year period.Investor can stick with his/her index mutual funds. I would prefer to use
exchange traded funds
as they have lower expense ratio but it is on every individual investor what he or she likes more.
Use technical stock market analysis
to time your entries and exists
What does it mean ? It is not necessary to be very active. I would like to recommend to learn
technical stock market analysis
basics and learn when to be invested in and
when to sell.
Do not afraid to
take profits
from the table. It is much better to buy and sell several times during 5 year period and take profits every time then see drops of 20% and more horribly as profits are vanishing. It is important to understand that any profit is real only AFTER investment or trade is closed ! Simple tool for timing these steps could be using stock market price chart of SP500 index together with
moving averages.
And the simple rules are: - BUY when price of index moves above 200day moving average and also 50day moving average moves above 200 day moving average
- SELL when index drops below 200 day moving average.
Examples from last few years can be found on these two stock market price charts:
These rules are very simple and should be more tested by investors which are interested in using them. But I thing these rules are good start how to think more about taking profits also for investors who do not want to be active investors or traders. They can save investors a lot of negative emotions, fear and generate money.
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