Market Timing is Not a Dirty Word(s)

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Many people, professionals and amateurs alike, believe in the old adage, ‘Buy and Hold for the Long Term.’ They believe once your investment program is in place you should not make changes due to market declines, even when those declines are as severe as they’ve been the last 13 months.

Just about all investment markets in the world have cratered 40% or even more over that 13 month period. The Dow Industrials, S&P 500, and NASDAQ stock indices are off 31%, 37%, and 42% respectively from January through late November 2008! I believe these losses, even though temporary, are too great for all but the most aggressive investors to endure. There has to be another way, a way we can reap the returns the markets have to offer without putting ourselves at risk of suffering these unbearable losses.

In fact, there is another way. The strategy we use is what I simply call ‘Trend Tracking.’ With Trend Tracking we don’t try to predict which direction the market is going next, or when it may start a new trend. We simply allow the markets to show us, and then we act accordingly. If the market is in a long term uptrend we simply get on board with the purchase of appropriate stock ETF’s and/or No Load mutual funds. If the indicators we track clearly illustrate a long term and deep ‘Bear Market as they have since January of this year, then we sell those stock ETF’s and No Load funds and move to money market and other safe havens.

Even though we hesitated this year and sold our stock funds in stages, we have for some time been in money market, treasuries and gold for our clients’ accounts. These maneuvers have protected our clients significantly as our losses are modest year to date. We are not only preventing further losses but are actually reaping modest gains over the last month or so.

An important but often overlooked aspect of prudent money management is protecting our nest egg from the severe downturns that occur on a regular basis. We have experienced two such downturns in just the last 8 years. Many people lost so much from 2000 – 2002 they’ve just recently recovered those losses and now they’ve been clobbered by the latest ‘Bear’.

Some say we will miss the big recovery when it comes. They say you have to be in the market in order to participate in the big early gains. Yes, we may miss some of those early gains. But I believe it’s far more important to be in safe harbors when the serious ‘Bear Markets’ are on the rampage. When the markets begin a new long term uptrend we will have ample time to recognize it and buy our favored funds. We don’t have to necessarily own those funds in the earliest stages of the new ‘Bull’.

In the last 25 years there have been 21 positive years as measured by the S&P 500, which means just 4 down years. But some of those down years were killers, ranging from a modest loss of approx. 3% in 1990 to a whopping 22% in 2002, and a horrendous loss of 37% this year alone! These are not the kinds of setbacks the prudent investor can afford.

The very same indicators that flashed a ‘Bear Market’ signal early this year will at some point flash a new buy signal. We will keep our capital safe and await that signal.

 

Steve Hood builds and manages “All Weather” no load mutual and exchange traded fund investment portfolios.

“All Weather” => Consistent performance through good markets and bad, resistant to market declines.

 

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