USING ECONOMIC INDICATORS TO REDUCE RISK IN STOCK-MARKET INVESTMENTS

This paper shows how the risk of price declines in stock market invest ments can be reduced by using a sequential signal system to determine when to buy or sell. The signals are based on growth rates in long-lea ding indexes and in broad stock price indexes. Tests of the method dur ing the past 20 years or more are shown for Australia, France, Germany , Japan, the UK and the USA. In some instances the reduction in risk ( measured in terms of volatility of rates of return) is achieved at the cost of a lower average rate of return, but in other cases the averag e rate of return may be significantly higher than that obtained by a s imple buy-and-hold strategy.