The date October 13, 2000 will forever be embedded in my mind. It
was the day after our mutual fund trend tracking indicator had
broken its long-term trend line and I sold 100% of my clients'
invested positions (and my own) and moved the proceeds to the
safety of money market accounts. Some people thought we were
nuts, but I had come to trust the numbers.
The shake out in the stock market, which started in April 2000,
had all major indexes coming off their highs, violently followed
by just as strong rally attempts. The roller coaster ride was so
extreme that even usually slow moving mutual funds behaved as
erratically as tech stocks.
By October, the markets had settled into a definable downtrend,
at least according to my indicators. We sat safely on the
sidelines and watched the unfolding of what is now considered
to be one of the worst bear markets in history.
By April 2001 the markets really had taken a dive, but Wall
Street analysts, brokers and the financial press continued to
harp on the great buying opportunity this presented. Buying on
dips, dollar cost averaging and "V" type recovery were
continuously hyped to the unsuspecting public.
By the end of the year, and after the tragic events of 911, the
markets were even lower and people began to wake up to the fact
that the investing rules of the '90s were no longer applicable.
Stories of investors having lost in excess of 50% of their
portfolio value were the norm.
Why bring this up now? To illustrate the point that I have
continuously propounded throughout the 90s; that a methodical,
objective approach with clearly defined Buy and Sell signals
is a "must" for any investor.
To say it more bluntly: If you buy an investment and you don't
have a clear strategy for taking profits if it goes your way,
or taking a small loss if it goes against you, you are not
investing; you are merely gambling.
The last 2-1/2 years clearly illustrate that it is as important
to be out of the market during bad times, as it is to be in the
market during good times. Want proof?
According to InvesTech's monthly newsletter it turns out that,
measuring from 1928 to 2002, if you started with $10 and you
followed the famous buy-and-hold strategy, that $10 would become
$10,957.
If you somehow missed the best 30 months, your $10 would only be
$154. However, if you managed to miss the 30 worst months, your
$10 would be $1,317,803! Thus, my point: Missing the worst
periods has profound impact on long-run compounding. There are
times when you end up better off by being out of the market.
Interestingly enough, if you missed the 30 best months and the 30
worst months, your $10 would still be worth $18,558, which is 80%
higher than the buy-and-hold strategy. This all comes about
because stock prices generally go down faster than they go up.
Wall Street and most people tend to overlook the value of
minimizing loss, and that is exactly why the bear demolished
more than 50% of many peoples' portfolios while I and those who
trusted my advice escaped the worst of the beast's rampage.
© Ulli G. Niemann
|
