Uncategorized, Weekly Update

Where Buy and Hold Investing Theories Fail Us

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Published January 4, 2019


Below are a couple of charts that provide a good overview of stock market investing from a buy and hold perspective. Note that the charts were published before the additional damage done to stocks in this month of December.

The first chart makes the case that volatility is the price stock investors pay for the high level of returns that stocks deliver over time. The stock market tends to experience a -10% downdraft at some point every year, with an average decline in stock prices of -14%. Certainly, as the graphic states, buy and hold investors are “rewarded for their patience” if they “stay the course”.

Intra-Year Declines vs. Calendar Year Returns

How much is their patience rewarded? The second chart buy and hold investors refer to is the one below. This chart takes the same return information as above, but packaged in a way such that the declines appear to be extremely minor compared to the huge blue gains in the stock market. One would think that the periods in orange are very quickly recovered by the enormous gains in blue periods.

S&P 500 performance throughout Bull and Bear Markets

Of course, the math doesn’t quite match up to the chart. The green circled area is a good example. The bear market of 2000-2002 looks rather small compared to five year bull market that followed. What’s not clear from the chart is that the -44.7% drop in the stock market from 2000-2002 would have taken a $100,000 account down to $55,300. The subsequent five year rally of +108.4% would have brought that account balance back to $115,244. It takes an +80% return to recover from a -45% loss. Thus, the vast bulk of the subsequent rally is simply recovering losses. Of course, investors were then hit with another -50.9% decline in 2008-2009 from which to dig out of.

Here at TimingCube we argue that investors do not have to suffer through the worst of these damaging declines. Our models are built to sidestep the bear markets shown in the charts while allowing us to participate substantially in the market’s better days. Through this approach, we capture much of the gains and fewer of the losses the stock market offers. This allows us to build wealth significantly greater than if we simply bought and held the stock market, while also preventing us from the difficult emotional strain of watching our account balances suffer the -20 and -30% declines shown in the above charts.

How does this work? Imagine if you only suffered a -10% decline (rather than -44%) in the 2000-2002 bear market; then, if you participated in only 80% of the subsequent rally (rather than +108%). We only capture 80% of the subsequent rally because we are not getting out at the top, nor are we capturing ALL of the following rally. We are trying to miss most of the damaging declines while capturing most of the gains. Our $100,000 account would have declined to $90,000 (painful enough, but much better than seeing it drop in half!). We would remain in cash until market conditions improved before investing again. We then see our $90,000 grow by +80%, leaving us with $162,000, compared to $115,244 if we remained invested throughout the market cycle. Not to mention the difficult emotional stress of seeing our nest egg cut in half! Repeat this process again through the next cycle, missing much of the 2008-2009 market plunge while capturing much of the subsequent uptrend. You can imagine that your investments are growing quite a bit faster!

Miss much of the losses from the market’s bad times. Enjoy the bulk of the gains from the market’s good times. Worry less about our investments. Sleep better. Make more money.

That’s our objective at TimingCube.

Market Update

On Monday, stocks closed out 2018 with gains during a quiet trading day, despite a terrible December and yearly losses overall. The S&P 500 closed up 0.9%, the Dow gained 1.2% and the NASDAQ brought up the rear with a 0.8% gain. Tuesday markets were closed for New Year’s Day, giving investors a much needed break from the recent volatility and time to reflect on 2018’s losses. On Wednesday, the volatility resumed with a fervor as markets opening sharply lower. Still, investors snapped up shares lifting the S&P 500 and Dow to 0.1% gains while the NASDAQ shot up 0.5% on rising optimism since the Democrats resumed discussions with the White House on ways to end the government shutdown. It was all for not however as Apple cratered in Wednesday after hours trading, announcing a huge revenue miss for the quarter and placing the blame squarely on a significant, yet seemingly unanticipated slowdown in sales in China. Thursday, stocks slumped across the board on the fallout from Apple’s negative pre-announcement. Apple stock tumbled nearly 10% taking Berkshire Hathaway stock down nearly 5% with it. Losses were notable with the Dow falling 661 points (2.8%), while the S&P 500 fell 2.5% and the NASDAQ was the worst of the bunch falling 3%. The S&P 500 gained 3.4% on Friday, as Fed Chairman Jerome Powell signaled patience and flexibility on rates in light of stronger than expected jobs data.

For the week, the major indices closed up: S&P 500 (SPY) up 1.87%, Nasdaq 100 (QQQ) up 2.13% and Russell 2000 (IWM) up 3.27%.

Warm wishes and until next week.