In regards to my recent post “7 Years Of Wealth Wiped Out,” reader VR had this comment:
It’s almost funny when I try to talk people out of buy-and-hold strategy and point them to your blog for market-timing.
Everyone is afraid of missing out on a big rally. They don’t really mind losing more than 50% of their investment to a bear.
The worst is that no one believes that the market could go further down from this level.
It’s hard for me to believe that anyone would be more concerned about missing out on a rally than protecting himself from downside losses. I suppose that old habits die hard because the buy and hold proponents have done a great job of brainwashing the public for a long time.
However, numerical facts, which most don’t bother to look at, show a different picture. You most certainly remember the last bear market of 2000, the brunt of which we avoided by selling on 10/13/2000. On that date, the S&P; 500 stood at 1,374. Two days ago, it closed at 779, which is a loss of about 43% over some 8-1/2 years.
Since most investors and professionals alike are desperately trying to beat the S&P; 500 performance, and most fail to do so, many portfolios have done worse. Looking at it another way, year over year, this century has not been kind to the buy-and-hold investor as the following chart shows:
This means a portfolio with a starting value of $100,000 would now be worth $68,000. 8 years of investing via buying and holding and nothing but losses to show for.
If the markets don’t provide us with a significant rally over the next couple of years, many investors will become acquainted with our own version of the “lost decade.”
Since bear markets are a fact of life, and can strike at anytime, a smart investor needs to recognize that fact by using some sort of an exit strategy. This century has shown that selling at the right time is far more important than when and what you buy.
Not selling can have a devastating effect on your portfolio, as we’ve seen, while missing out on the initial stages of a bull market will merely reduce your potential profits.
Comments 5
Hi VR,
You are right on and I agree 100% with this blog article. Some of these money managers that use buy & hope strategies may end up being called money manglers after all.
L.G.
People have a ‘get even’ mentality and are unwilling to take a small loss, preferring to wait it out for ten year or more to ‘break even’.
Another bugaboo is getting whipsawed. If you cut your losses on a sell signal, then get a buy signal at a higher price, people are often convinced that it would be better to buy and hold.
A few whipsaws would have been well worth the price over the period you have illustrated in this blog.
Hi Ulli,
I was curious as to how your buy/sell signals for your TTI (domestic) actually performed in the real investing world so I did some testing using my favorite 4 highly diversified mutual funds, which I don't feel comfortable revealing their names publicly, but trust me they are good ones in up trending markets with longer term histories. Below are the average results, long only, using my 4 funds and your buy/sell dates on your weekly chart. I also checked out the the results using 1 beta bear funds for the NASDAQ100 and the SP500 during the sell signal periods and that didn't work out so well.
BUY/SELL DATES ($10,000 Investment)
04-29-03 05-18-04 25.93% $12,593
10-05-04 05-17-06 37.95% $17,372
09-06-06 01-18-08 15.02% $19,981
05-15-08 06-23-08 -4.87% $19,008
06-23-08 02-20-09 cash $19,008
This produced a C.A.G.R. (compounded annual growth rate) of 11.71% from 04-29-03 until 02-20-09. 11.71% compounded per year is great considering that we have had that horrible stock market crash of 08 & 09 so far that has devasted the buy & hold crowd.
Anyone who says one can't time the stock market is either really dumb or lives under a rock.
Larry G.
Larry,
Thanks for the testing and sharing your results.
Ulli…
Ulli,
If one would have invested $10,000 in the SP500 SPYs on 04-29-03 and held till 02-20-09 the same time period that Larry did with his back-test of your TTI (domestic) that same $10,000 would now only be worth $9,189, which is 8.11% loss as compared to his 90.09% gain, what a difference. Eat that buy and holders.
C.A.G.