Reader Don had an interesting experience in that he is a trend follower by heart but also wanted to experience the other (dark) side of investment life by splitting his portfolio and going both ways; trend following and buy-and-hold.

Here’s what he had to say:

I subscribe to Al Thomas, read your blog, and get your weekly update.

What a great, invaluable service you provide. There is really no excuse for anyone to be sitting in a 40% down position. You give your information free, and one just has to go with the TTI. How hard is that? I have one account that is in cash and another that has 20% buy and hold in ETFs. I wanted to experience buy and hold through a bear market. It feels lousy, but I have stayed the course. It is down thousands of dollars.

So it is little wonder that most people use buy and hold.

In theory, holding an investment over the long-term sounds fine and good, but there are a couple of other issues to consider.

First, emotionally most investors are not prepared to handle any sharp downturns. Sure, they are getting sold on the idea that the market always comes back. OK, if that is so, then why are just about all investors incredibly upset about seeing their portfolios taking a haircut of some 40% this year? That fact should not really matter if you’re convinced that the market will come back at sometime.

Here’s where theory and practice clash big time. Before a loss actually happens, investors can theorize all they want as to how they will ride out any potential downturns. Once disaster strikes, they find out that they were not prepared to take the hit after all.

That brings up a second issue, which I have touched on many times before. If you take a portfolio hit of some 40% that means that you have to earn some 66% on the remaining balance just to break even.

How long will that take?

If the market cooperates, maybe 5 years or even longer. In other words, you will be wasting the next 5 years of your financial life to make up losses you should have avoided in the first place. Since your financial life is considerably shorter than your physical life, the impact can be severe.

It’s interesting that during the last bear market of 2000 – 2002, I received the same sounding emails and calls as I am getting now. Investors are upset because they feel mislead by the usual investment garbage of asset allocation and Modern Portfolio Theory (MPT), which did nothing to protect their capital. Not only that, it wiped out years of profits putting most investors severely behind in their investment/retirement goals or forcing them to extend their work life.

But hey, in the really long-term, the markets will come back, so there is nothing to be concerned about. Yeah right! Following that theory, we can all retire about six years after we have died.

Not losing your shirt in a bear market, so that you will be around for another bullish period, is on of the most important lessons most investors will have (hopefully) learned once this bear has run its course.

Al Thomas, author of “If it doesn’t go up, don’t buy it,” wrote another timeless piece on the subject titled “How to profit in a bear market.” Have a look:

Hope you didn’t lose any money in the market this year.

The one who loses the least in a bear market is the winner. The money he did not lose is really a profit.

[emphasis added]

Amen. I couldn’t have said it any better. In case you don’t know, losers, according to the emails I have received, are everywhere. Whether you received portfolio advice from a bank’s investment department or money managers who are handling billions of dollars in clients’ assets, the result has been the same: Everyone has lost some 40% – 50% of portfolio value during the first 10 months of this year.

Some investors were smart enough to realize the fallacy of buy-and-hold in a bear market and bailed out of their positions while they could. Others stayed put and have paid a very steep price for the education received. Do yourself a favor and read Al’s above article again—and then pass it on to a friend.

Based on last week’s market rebound, you’d think that Wall Street investors have absolutely nothing to worry about. Of course, the market was so oversold that a bounce was overdue no matter how many negative economic news events flashed across the computer screens.

For more on that, and what may be in store over the next couple of years, take a look at economist Nourial Roubini’s video.

He was one of the few who forecast the current crisis two years ago and, while that does not guarantee that he will be right again, he offers some compelling arguments about where he thinks the S&P; 500 will end up before this crisis is over. You will be surprised!

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

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

The bulls finally had something to cheer about for five trading days as a nice rebound ended a horrible month.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -14.95% thereby confirming the current bear market trend.



The international index now remains -23.53% below its own trend line, keeping us on the sidelines.

There are varying opinions as to the effect of yesterday’s ½% interest rate cut. The general view is that it is not a quick fix as MarketWatch noted:

Economists believe that the rate cut will not quickly cure the ailing economy. “Everyone wants a quick fix, but it takes time,” “said Mike Wallace, an economist with Action Economics.
…
But bringing rates lower right now might not help very much, analysts said, because the effective federal funds rate has already fallen to 1% because of a new Fed policy to pay banks interest on the excess reserves they deposit at the Fed.

“As long as there are benefits they’ve got to keep trying,” he said.
The lower fed funds rate has helped marginally to unclog credit markets and restore some confidence in markets, but credit remains tight despite the Fed’s moves.

I agree that the rate cut will not have any effect on the consumer at all. Now that the Fed has used some more ammunition by lowering the Fed Funds rate aggressively to 1%, how much lower can they go? The accompanying statement clearly signaled that further cuts are possible. Hmm, can you really see a rate of zero percent?

Wall Street generally likes lower interest rates, because they support the bullish crowd—up to a point. Too low of a rate clearly signals that there are severe economic troubles ahead, which may be an encouragement for the bears to remain in charge.

When I stepped out of the airport at LAX yesterday after a 12-hour flight from
Europe, I checked the closing market numbers and felt that Wall Street had rolled out the red carpet in honor of my return.

A 10% rebound seems impressive, although as beaten down as the market was I have to admit that I’m not surprised. Bargain hunting, short covering and exuberance about the widely anticipated interest rate cut today, gave the bulls something to cheer about.

It may very well turn into the old adage “buy the rumor, sell the fact,” since sharp rebounds during this bear market have yet to show some staying power. While I welcome this turn, I am far from convinced that this will be the end of the bear as some proclaim.

It’s good to be back in the U.S., and I hope to catch up with all emails and phone calls over the next few days.