In a 401k where one can only long mutual funds, has anyone thought of a strategy to protect oneself from a down market? For example the vast majority (and 100% that my Company allows me to purchase via my plan) of mutual funds followed the market and lost big in 00 and 01. My two holding are Vanguard 500 Index and Fidelity Low Price Stock fund. Two things I'm thinking through are: 1. Simply exit (move to cash) when the S&P 500 breaks its 200 ma line and begin new weekly contributions when breaks above the 50 ma, and finally put remaining lump sum when it breaks above the 200. 2. Purchase put option(s) on S&P futures. Objective - capital preservation while obtaining as close to overall market return as possible. I know this is probably below most ET member's expertise, but I really appreciate those that would consider providing some direction. Thanks much.
Speaking as a CFA Charterholder (where I learned that markets are efficient and timing is a waste of transaction costs), I would say to pick an allocation to stocks that you feel comfortable with and stick to it. Speaking as a trader who knows the markets are not efficient, I would say the best way to protect assets from a down market is to move them out of equities. Buying puts is good protection from crashes, but doesn't work very well if the market gradually works its way lower. Combining these two philosophies... if you have reason to believe the market is going lower (but aren't sure), then sell some of your equities. Maybe move a third of your equities to cash reserves or an ultra-short term bond fund. That would take your allocation from, say, 60% down to 40%, or 90% down to 60%. If the market does go down you'll be happy to lose less money and if it goes up, you'll still be in a position to profit.