The Lazy Man's Guide To Long-Term Investing

One of the major challenges for the long-term investor involves the amount of time and attention they have to devote to managing their portfolio. What with reading the financial pages, subscribing to x-number of magazines, and time spent online seeking new ideas and perspectives, it's easy to see how managing investments could evolve into a true part-time job.

Wouldn't it be great if investors with a long-term outlook could have a simple, easy-to-implement strategy, one that wasn't so time-consuming or unnecessarily complex?

Although the "experts" would have you think otherwise, there is, in fact, a little-known method that works with extraordinary ease and outperforms buy and hold by a long shot. It keeps you in the market when it is rising and out of the market when it is falling. And that's exactly what you want, isn't it?

This is all you have to do. On the last trading day of each year, review the year's prices for one of the following four conditions:

1. If the high for the current year is above the high of the preceding year and the low for the year is above the low for the previous year, this portrays a rising market and tells you that conditions are favorable for committing funds.
2. If the high for the year is below the high of the preceding year and the low for the year is above the low for the previous year, this portrays a stagnant market and tells you that conditions are not favorable for committing new funds, but previously allocated monies may remain fully invested.
3. If the high for the year is below the high of the preceding year and the low for the year is below the low for the previous year, this portrays a falling market that says that conditions are unfavorable and all investments should be liquidated.
4. If the high for the year is above the high of the preceding year, the low for the year is below the low for the previous year, and the lower low preceded the higher high, this suggests that the market has completed a correction and is poised to move higher. As such, conditions are favorable for committing funds.

Figure caption: At the end of a year, check to see if these four conditions have been met.

That's all there is to it! This simple method has captured about 90% of the entire gain in the Dow Jones Industrial Average (DJIA) since 1920. This system has such exceptional results because it kept the investor out of the market for almost 40 years during which the market was going either sideways or down. When the system was tested on the Standard & Poor's 500 between 1958 to 2001 (so far), drawdowns occurred during 1975 and to a lesser degree in 1963 and 1971.

Of course, during those years when you are out of the market, the investment capital should be invested in no-risk instruments such as Treasury bills. The end result when you factor the stock market gains plus the T-bill returns? A method that outpaces buy and hold and leaves enough time to mow the lawn.

R.M. Sidewitz is chief executive officer and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. For additional information on long-term investing, go to www.longterminvestor.org.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.