Does a 200-day moving average strategy work over the long term? In recent commentary for the American Association of Individual Investors, AAII Journal Editor Charles Rotblut takes a look at the question, using data from Wharton Professor Jeremy Siegel.

Rotblut says that in his new fifth edition of Stocks for the Long Run, Siegel examined how a 200-day moving average timing strategy (in which an investor buys stocks when the Dow Jones Industrial Average was at least 1% above its 200-day moving average and sells stocks when the Dow is at least 1% below its 200-day moving average) fared from 1886-2012. The results: The approach generated annualized returns of 9.73%, which fell to 8.11% once transaction costs were factored in. A buy and hold strategy averaged a 9.39% return. The timing strategy did have reduced risk for most of the period, however, and would have kept investors out of stocks during some of the worst times, including the 1929 and 1987 crashes and the 2007-09 bear market. “The timing strategist participates in most bull markets and avoids bear markets, but the losses suffered when the market fluctuates with little trend are significant,” Siegel said. “The timing strategy involves a large number of small losses that come from moving in and out of the market.” 

Rotblut adds his own note of caution: “If an investor lacked cold-as-steel nerves and either failed to sell or buy stocks when triggered, the timing strategy’s performance would be much worse,” he says. “This is the inherent problem with all trading strategies. An investor who is psychologically unable to stick with them during turbulent market conditions is always better off with a buy and hold strategy. It does not matter how well a trading strategy has performed in the past; if an investor cannot stick to it in all market conditions, his portfolio will suffer.”