Is the average mean good enough for your retirement???

We traders know that “oversold” or “overbought” are heavily used, often improperly. But there is clearly merit to these terms when looked at as a zone not an absolute level. This enables us to have a bias, without doing heavy prediction or flat gambling.

In long term investing your cost basis has a huge effect on your overall bottom line. If you buy low the odds of being able to sell higher go up drastically. So why would you put a flat % in every period, regardless of the condition of the market? Why would you buy the same amount high as you would low? YES, I understand the 401k marketing machine and how by putting in the same each time you are “cost averaging”. And you are averaging, but not as efficiently as you could be. Shouldn’t you strive to improve your cost basis and achieve better than just the average mean? This is your NEST EGG after all, something that will determine your quality life after you’re done serving your time.

Is it possible that with minimal effort you can do better than the blind herd and gain more than just the average mean? I say YUP! There are many strategies that can be used. Brainstorming this AM brought me to the following as perhaps a better practice than mean based cost averaging…

Don’t add at all while the market is in the “overbought” zone. When in neutral deploy say 5%. Once it drops to the “oversold” zone and the indicator flattens or hooks up begin to put in 10%. This simple premise will keep you from paying high, put you in the market buying the mean/neutral and down times and have you doubling down after the market was just beat up. The key on the buy zone is let a hook form or a period of basing/flattening first. Don’t throw added good money in the turmoil…keep some powder dry. After all, you’re still buying 5% on the drop as it is. We only want to double down when the drop stalls.

The below chart shows the zones as they relate to the price you would have paid. This simple slow stochastic indicator is available on FREE sites. I personally use and think www.bigcharts.com is a great free tool you have at your disposal. You could glance at a monthly chart of the S&P500 (SPX) with that indicator and know if you’re getting a good value or not, instantly. I’m not suggesting daytrading or going insane trying to beat the mean. I’m suggesting that through proper timing you can easily beat the average mean quite handily.

A more advanced technique is to look for divergence as depicted on the below chart. That is…where stochastic (momentum) is fizzling out despite the price continuing on higher or vice versa in a downtrend. This never guarantees anything but it does serve as a major warning sign in general. How could price go up despite the fact momentum is going down? When the market diverges or acts different than other indications would suggest it’s time to take note, a correction is quite possible. When the news is heavily lopsided it’s often another warning sign…as hard as it is to go against the grain of society.

I’ll be building on this in the near future. I’m now in charge of my IRA and am getting into the long term mindset again. I love daytrading the YM and what not but long term is a HUGE part of a nest egg. If nothing beyond it acting as a tax shelter, it’s a piece of the puzzle that shouldn’t be overlooked.

I look forward to someone ripping on this, maybe we can then go back and forth to improve both of our theories. I’m sure there are tons of ways to go about this, I’m just throwing 1 concept out quickly.

I can hear bitching and groans already about things like…

“That’s too much to manage, You mean I have to change my % and do work?”
Yup, DO WORK!

“It’s so confusing, I don’t know what I’m doing!”
Then get your head out and do some research. LEARN. I mean…WTF…it’s only your ability to eat and survive after retirement were talkin about here. Legwork early on can set you up for an easier and more fruitful retirement.

“What if the market goes higher and higher, aren’t I missing out on buying? Can’t I buy high and sell higher instead of buying low and selling high?”
Depends on what you term “missing out”. There will always be corrections that give you a better buying opportunities. One twist I thought about was…put 1-2% in while “overbought”. That way you are buying high, but buying fewer overpriced shares. There are a million strategies you could build, I’m merely sharing one of my thoughts. The market moves in cycles/waves and it will NEVER go 100% one direction. It’s a 2 way auction, it’s not possible for everybody to always be bullish. Keep this in mind when euphoria creeps in your mind. “Be fearful when others are greedy and greedy when others are fearful”

“I have an advisor. He says NOW is the time to buy, and I’m already missing out”
Is he paid by gains or by transaction? If someone has something to gain off me, I take their info with a grain of salt. If they are paid when I transact their info is likely self promotional. If they ONLY gain when I do, then they have incentive to make you money. Still…it’s YOUR retirement being tampered with. Bottom line, don’t be complacent, do some of your own homework.

“Then I may not have the same paycheck amount from month to month. I like knowing what my check is going to be every time.”
WAHHHH! Seriously. If you sacrifice nothing you will in turn gain nothing. Again…it’s only your retirement years that we’re talking about here. I would think it’s worth adjusting your income a few % a few times a year to enable your nest egg to do more than just keep up with the mean average. But if you like being average and mediocre…by all means worry about the few bucks each paycheck. LOL