Yesterday, I tried to shed some light on the question as to whether over time maximizing gains is a better strategy as opposed to minimizing losses.
I used the past 8 years of this century and concluded that in fact minimizing losses is a better long-term investment solution. The question remains how long should long-term be when used as an investment horizon?
If you ask the buy-and-hold proponents, you will immediately get the good old stand-by quote that equities have compounded annually at some 9% over the past 50 years. While that sounds great on the surface, it does not tell the entire story. It totally neglects the fact that you have to go through extreme portfolio pain (translation: sharp bear market drops) with years spent of making up losses in order to get to that 9%.
It simply is not reality to follow such a scheme, unless your parents set up an investment account for you when you were still running around in diapers and made regular contributions, which you later on continued without fail until you reached age 50. In that case, I can somewhat accept the 50-year buy and hold scenario.
Unfortunately, this is not how the real world works. I have witnessed it to play out more like this: A young person gets a job, and if he is lucky someone talks him into opening an IRA and making a regular contribution of $2,000 a year starting in his early 20s. Modest success lets him keep the contributions going and in his late 20s he’s got some $15k stashed away. Then all of a sudden, he’s got to have that new fishing boat—and there goes his IRA.
Years go by before he recovers from this “loss” and actually gets around setting up a new one. A few years later a hot opportunity lurks with a private placement—and there goes the IRA money again.
I am not making this up; I have actually witnessed this very example with clients many years ago. I have concluded that most people don’t really get very serious about retirement savings until they reach their forties. Add marriage, children and a home purchase to this equation and you can see why most people are getting delayed with retirement contributions.
From my experience, this scenario seems to be the rule rather than the exception. Given that, most people don’t really have much time to build their retirement assets. That means if your time frame to accumulate is shortened, you have to be very careful as to how you invest your money. You certainly don’t want to add insult to injury by losing big in a bear market and then spending years having to make up losses rather than adding profits.
That is the danger point many have reached. In only 9 years during this century, we have witnessed 2 bear markets, which have put many portfolios in the loss category century-to-date. This current bear is far from being over and the big unknown is how long will it take for many to make up last years devastating losses?
Yes, we’ve had a nice recovery over the past few weeks. This has helped those hanging in there with buy and hold to recover, but they still have a long way to go before they reach the break even point. If this market reverses and heads further south again, more portfolio pain will be inflicted.
My issue is that you are simply asking for trouble when looking at investment returns that are too far out in terms of time frame, because you won’t live long enough to see that 9% over 50 years. It makes more sense to me to not put yourself in that helpless situation of letting the financial markets run your life and determine your fate instead of the other way around.
Using trend tracking, or any approach that advocates the use of sell stops in some form, is far more preferable than being a mindless buy-and-hold investor. You simply don’t have enough time to wait for the rewards to come in.
Just ask any 60-year old investor, who has just seen his $1.2 million retirement portfolio slashed in half last year, how he feels about the long-term buy and hold rewards. You will not like his answer.
Comments 6
“Just ask any 60-year old investor, who has just seen his $1.2 million retirement portfolio slashed in half last year, how he feels about the long-term buy and hold rewards. You will not like his answer.”
I am a 74 year old investor who has seen his retirement portfolio “…slashed in half…”, and it’s still much larger than I ever conceived of as a tyro investor just starting out.
Your example of how long term investors make foolish decisions (“…got to have that new fishing boat…”) would apply equally to the investor who subscribed to a trend-following, or any other, strategy.
I am not advocating nor denouncing a buy-and-hold strategy–just sharing my experience.
Ulli,
Most people I talk to are procrastinators when it comes to setting up and or funding a retirement account. I talk to a lot of people in passing and seldom do I run across anyone who knows what a bull or bear market really is. They also haven’t a clue as to what an ETF is or a bear fund or bear ETF or bear fund sometimes referred to as an inverse fund. They haven’t a clue as to what an index is as to how it relates to a index fund. So I am not surprised that the general public is trapped in this buy and hold camp, because they choose to remain ignorant, lazy and at the mercy of their Financial Planner, Broker or “Money Mangler”, which are all about the same thing in a lot of cases. All these people that have been mangled twice now in this century better wake up to the fact that nobody else is going to take care of their retiement for them in most cases. These people are going to have to got off their butts and learn what is needed to manage their own accounts wisely. Many of the people I converse with are gambling with stocks and get whacked so badly with the bear markets that like you said in the above article will never live long enough to break even. These same people are destined to continue to repeat the same losing behavior until they start learning how Wall Street works and how to play the game from the winning side for a change.
TrendMan
Ulli,
That 74 year old half broke fellow that has been mangled by the bear apparently knows nothing about trends in the market, but only buy & hold. Equating buying a new fishing boat as being the same foolish thing to do as subscribing to a trend following or similar type service is ridiculous as he must not know much about investing as he already said he lost about 50% of his account "HELLO". Maybe it is time for him to check trend timing out after all before he loses the other half. I used trend timing and I made some money on the way down plus interest on some CDs after selling my long positions and buying one bear fund RYURX and lots of bank CDs back at the end of October, 2007 and still in those positions yet today. I did the same thing with the 2000-2003 bear market, got out of long positions mid-March of 2000, Yeah I know trend timing doesn't work, REALLY?. My statement to the 74 year old, you missed out on a great opportunity and are in danger of losing the other half of your account by the time this secular bear market ends. Not trying to put anyone down, just sharing my experience.
B.M.
Ulli,
I have been a follower of yours for quite some time. Thanks so much for your good work and information that we get from both your free weekly letter and this blog. A reader up above mentioned something about trend timing services being foolish, well I take issue with that to an extent. I have tried many of them since the late 60s maybe at least 12 and I must admit most weren’t worth the paper they are written on. The problem is they are great until one subscribes and then they for some unknown reason start devating from their original plan that eventually causes failure. Ulli has kept his the same over all these years. He now has an optional strategy call a Simple Hedge, but again it is optional and his original plan is still in tact.
I feel so sorry for the 74 year old retiree who is half broke as he/she probably won’t live long enough to get that lost money back and as frightening as it may be actually lose the other half with those haphazard investing skills.
George D.
To be fair to the 74 year old retiree, he pointed out that a trend follower who cashes in his nest egg to buy a boat or something else could do so with bad timing.
If he lost half of his portfolio, then he must have clung to his stocks when prudence would have caused him to move all or most of his money out of the market.
Once I held a stock through a bear market and finally got back what I paid for it about 15 years later. I now cut my losses to prevent that from happening again.
It took me a while to realize that cutting losses means more than jumping out of one losing stock to another loser in a bear market when almost all stocks are losers.
Ulli,
I am a an older investor who like the above 74 year, lost about 47% of my retirement portfolio after I was already retired, now that was scary. The worst of it is that I was a buy and holder back when the bear struck in 2000, rode it all the way down and all the way back up to the recent peak and now the recent bear has taken away about 55% of my retirement plan from this recent peak. Think about it all those years wasted buying and holding. Recently I have studied several trend tracking/timing methods that are free to use. I found that 3 work very well and beat buy and hold. Yours Ulli is one of them that beats buy and hold in most cases because you protect people from huge losses during bear markets. The only draw back on yours it that it isn’t very efective to use with bear funds during sell signals. I only wish I had known all these things 10 years ago.