What we’re doing to align portfolios in the current environment: Moving Daily Average Strategy

By David Koch, CFP®, AIF®, CFA, Senior Wealth Advisor

Halbert Hargrove has a feature that can be added or removed to a client’s account called a Moving Daily Average strategy (MDA). It’s a specific trading strategy designed to reduce risk. We’ve utilized this strategy for almost a decade to help limit the damage when markets see a significant downturn.

Unless you’re in the business of short selling, large stock declines are painful. As Brian Spinelli noted in his blog piece late last month on tax loss harvesting, there’s very little good news during down markets. The MDA has given us one of these bright spots.

How the MDA works

When stocks are going up, you want to own more stocks. But when stocks are going down, you want to trim your position. In a nutshell: by comparing the current price of an investment relative to its moving daily average (50, 100, 200 days, etc.) you receive an in or out signal. Based on the signal, you are either in the investment or out of it, holding a cash proxy. This sounds pretty simple – but it takes oversight and discipline to do it consistently.

We devoted our Q4 2017 Commentary to the MDA strategy. In it we noted:

A good analogy [to MDA] might be that while we’re going with the flow of traffic on the freeway, we do not have the cruise control on, and in fact, we’ve got our foot hovering over the brake …We’re just prepared to take some risk off the table should the stock markets exhibit a precipitous pullback.

At the time we wrote that piece, of course, we were in the midst of a bull market. Who could have foreseen what would happen to the markets in March 2020?

There are times when the MDA’s signal is false – in which we exit markets only to reenter shortly thereafter. Finding the true signal amongst the noise is the primary challenge. Sometimes however, the signal is true, and the results can be profound.

How it played out in late February

Our first MDA signal this year had us trade out of stocks and into a cash proxy on February 26th 2020, and again with another tranche out of stocks and into a cash proxy on March 2nd. We then saw a dramatic decline in the equity markets globally. Needless to say, the trading strategy has worked wonderfully this time. Although we know that these signals are “false” approximately 2/3 of the time, it clearly pays to continue to stay disciplined with the strategy for times like these.

Balancing investment risk and reward for each client’s unique situation is our unremitting focus in every market environment. If you have any questions about how we’re implementing the MDA strategy on your behalf, please don’t hesitate to get in touch with your team.

For more information or questions, please contact Halbert Hargrove at hhteam@halberthargrove.com