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|There have been 15 bear markets since 1929, and on average, they have chopped 35.1% off the Standard & Poor's 500 index. This means that if you had used a buy-and-hold strategy during this period, it would have taken years to recoup the loss. Look at the bear market that took place in 1987 (Figure 1). It wasn't until 1991 that the market finally stabilized and resumed its upward trend. |
A buy-and-hold strategy sounds great. Why wouldn't it? The concept seems ideal: buying stocks of solid companies that promise future growth or investing in top-rated mutual funds without having to worry about their performance on a regular basis. But buy-and-hold can eventually end up in a devastating failure.
Buy-and-hold is actually an archaic timing strategy, the rules for which are:
Most investors can handle relatively small losses. For many, however, their viewpoint will shift as their losses mount, especially as they rise past the 15% level. As your losses get bigger, your fear of further losses grows exponentially. Eventually, this leads you to finally sell, with the hope that things will be different the next time you venture into the fray.
In addition, buy-and-hold investing becomes dangerous when you need access to your investment capital relatively quickly, whether to buy a new home or for retirement purposes. Think about it. Suppose you have designed an investment plan such that you need to have the capital for whatever reason in 10 years. Suppose the market suffered a severe setback in that 10th and final year. The market correction and the ensuing bear market could wipe out one-third or more of your portfolio, preventing you from reaching your goal of buying a house or retiring. This would mean you would have to wait for an even longer time before having the capital you need.
Market timing strategies don't have to be difficult to grasp. If you aren't comfortable employing such a strategy on your own, there are professional money managers who utilize market-timing systems. Most systems work well in reducing market risk, and some outperform the market averages. Even a simple 40-period moving average has worked effectively over the years. For example, Figure 2 shows a weekly chart of the American Stock Exchange (Amex) biotechnology index with a 40-period moving average overlay. When prices fall below the moving average, you should consider moving investments out of this sector and into the health-care sector (Figure 3). The S&P health-care index is still above its 40-period moving average.
Market timing should definitely serve as a foundation to all your money management strategies. It can help you reduce losses during bear markets and improve the overall performance of your portfolio.
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.
|Company:||Qi2 Technologies LLC|
|Address:||4800 Baseline Road, Suites E104-370|
|Boulder, CO 80303|
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