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.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Continued worry about the survival of the banking system pulled the major indexes deeper into bear territory.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -10.40% thereby confirming the current bear market trend.



The international index now remains -20.43% below its own trend line, keeping us on the sidelines.

MSN Money reported that another alleged fraud has taken place (sorry, no link):

The markets took it on the chin yesterday with all major indexes heading sharply south and honing in on last November’s lows. Actually, the Dow came within 31 hundredth of a point of taking out the November 20th level.

The November low of 752 of the S&P; 500 held up so far, but we have moved within striking distance. Causing this ruckus was the fear and worry that the stimulus package most likely won’t eliminate any recession pains.

In addition, Wall Street traders may have finally woken up to the fact that there is a recession going on around the world that seems to be increasing in speed as well as in magnitude and that other stimulus packages may not work either.

To readers of this blog, this should come as no surprise as I have questioned the wisdom of any stimulus or bailout program from the very beginning. It now remains to be seen if there is more follow through to the downside. If the 752 level on the S&P; is violated, you could see some indiscriminate selling, since this bottom has been hailed as the real thing.

To be clear, a break below it could bring the widely forecast 600 to 650 level into play, which would be absolutely devastating to the buy-and-hold crowd. Being safely on the sidelines is the only appropriate position during these times of madness.

MarketWatch featured a story titled “Seven Years of Wealth Gone.” Here are some highlights:

The nest egg of the typical American family is smaller now than it was seven years ago, according to Federal Reserve data released Thursday.

“But a lot has happened” since the end of 2007, a Fed economist said. As of October, median net worth had fallen to $98,900, down 3.2% from the end of 2007 and 2% below the level reported in the 2001 survey that was conducted after the dot.com bubble burst. Since October, stock prices have fallen another 15%, while home prices have fallen at least 2%.

These facts simply support my argument that consumers have reached a dead end and are in for some changes. No matter how much stimulus is being pushed via various packages, most families are forced to make the switch from spending to saving with easy access to credit now being history, as I pointed out yesterday.

Lost wealth will need to be rebuilt via stringent savings programs and elimination of unnecessary expenditures. With many retirement accounts having been cut in half last year, I can only hope that investors have learned their lesson and run away in droves from anyone preaching buy and hold combined with a canned asset allocation program.

I for one will continue on the path of spreading the word about trend tracking as it seems to have been the only investment method which was validated last year.

The last couple of days I talked about the long-term impact of last year’s market collapse. The dark side of the burst credit bubble will be with us for a long time and most people have no idea yet how their lives will be changed forever.

Wishful thinking by the Fed and the government that we can continue with a consumer driven economy will be a fallacy. Stimulus packages will not have the desired effect and will do nothing but burden future generations with debt. For the past 30 years, the American consumer has been the proverbial hamster on the wheel stuck in a rush of an ever increasing spending spree.

Those times are over as this busted credit bubble was the final nail in the coffin. No more housing ATM, or overloaded debit cards along with easy access to credit. The impact of the now deceased consumer has had a worldwide impact as the Asian export economies are in a freefall as Mish at Global Trends reported.

Something has to fundamentally change in the way the future economy will function. I am not sure exactly how it will turn out, but I agree with Steve Ballmer, CEO of Microsoft who described the world economy in these terms:

Ballmer said that economic growth in the last 25 years was fueled by innovation, globalization, and debt–and that the current levels of debt were unsustainable. “In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 percent,” he said. “Last year, private sector debt as a percentage of the GDP: 300 percent, far more leverage.”
…
“In my view, what we now have will be a fundamental economic reset,” he said. “The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.”

While this fundamental reset is something that I have been thinking about for a while, it’ll take some time until the policy makers of this country realize that we will not return to the old “buy now and pay later” system at any time soon.

This maybe a dire view to you, but keep in mind that change also offers great opportunities for the creation of new concepts and companies. Investment wise, you can get a head start by patiently following the trends in the market place and making your decision when upside breakouts occur.

With so much uncertainty upon us, I firmly believe that trend tracking is the only way to keep your head above water and your portfolios safe. If you followed along last year, and avoided the sharp losses that many suffered, then you’re way ahead of the investing public.

There is a good possibility that this volatility will continue and lower lows will be made at sometime. Do your fellow man a favor and pass on the link to my free newsletter and this blog. Millions of people are not familiar with these concepts; you can make a difference, which could save someone’s portfolio from further destruction.