A Long Term Investment Timing Signal That Works
There are all sorts of people parading around saying "its time to buy" on CNBC (as there have been for the last couple of months) - how'd that work out if you bought in December?
For a bit of history, here's a lesson from the last time we were here with a bear market:
How much of your money would you like to lose?
Have you ever noticed that the "crooners" on Television never tell you to get out at or near the top, and call it a "buying opportunity" all the way down? Well gee, the last time they did this it only took 7 years before you were back to "even", and of course that's before price inflation ate up all your money.
Here's a hint kids, and this one's free - here's a long-term timing signal that, over the last 20 years, has never lost money.
This is a very simple timing signal that requires no more than 2 minutes a week to monitor and yet if you followed it over the last 20 years it has produced very few whipsaws and on balance has had you out of the market for all major bear trends and in the market for all major bull trends.
The use of this strategy is simplicity itself - you buy the SPY (or a S&P 500 mutual fund such as VFINX) when the 20 week moving average crosses the 50 week moving average by more than 1%, and you go to cash (or treasuries) when the 20 week moving average crosses the 50 week moving average in the downward direct by more than 1%.
The 1% threshold is to reduce whipsaws - typically, on a real trend change this only keeps you in the market (or out of the market) for another week or two beyond making the move right on the cross.
If you go back and look at the S&P 500 for the last 20 years, you have never been left out of a bull, or in a bear, if you followed this signal. Never.
Now you know what they say about "past performance does not equal future results", right? Its absolutely true, and your mileage may vary. This signal may stop working at any time, and it may start producing punishing whipsaws.
But over the last 20 years, it has performed insanely well.
If you are a long-term investor - for example, you're investing for retirement and have a 20+ year time horizon, you care only about beating the index over long periods of time. The magic of compound earnings takes care of the rest.
There's a nasty little secret that the market "crooners" will not tell you, but it is absolutely essential if you are to have any chance of beating the index over time - your total return must be measured against BETA, or risk!
That is, its easy for me to beat the index if I take lots of risk. Its also easy for me to lose a lot!
The nasty part of losses is that controlling them is absolutely essential. See, if you lose 50% you must then make a double, or 100% gain, to get back to where you were. For obvious reasons if you take big losses you're in deep kimchee, especially with your retirement money. Avoiding those big losses is absolutely essential!
So the key is to reduce beta while outperforming the index. And how does one reduce beta? One important way is to be out of the market, thereby taking zero risk, during bear markets!
Since the market is, on average, in a "Bull" about 75% of the time, if you are in cash the other 25% you will have a beta of 0.75 automatically, assuming the rest of the time you're in the index.
But you will grossly outperform the index since you will catch little of the big declines but most of the big advances!
Now you can pay some "managed mutual fund" to try to time the market and pick stocks, and likely underperform the averages, or you can use what you just learned, do it yourself, pay nobody any of those ridiculous fees, and you're odds-on to outperform those so-called "managers."
Oh, and while if you're investing in a tax-advantaged account (e.g. 401k or IRA) tax efficiency doesn't matter if your investments are in a taxable account this indicator is also extremely tax friendly, on average generating taxable events only once every three to five years, all at long-term capital gains rates.
One question raised on the forum is "why not use leverage and go into SDS when you get a sell and SSO on a buy"? My answer to that is simple - this is for long-term investors, not traders. If you're a trader then why would you follow something like this at all? The point of long-term investing is to build capital over time, not speculate!
Make up your mind what you are with what portion of your portfolio and act accordingly.
Oh, and on the "financial media" - if their purpose is to educate (and not obfuscate and/or simply screw you out of your money by getting you to buy when you shouldn't) then why is it that this - the most simple of indicators, yet one that has a 20 year track record of outperformance for long-term investors - is not covered? Yet you hear Kudlow every night talking about "investing for the long run."
What purpose does the financial media have again?
Something to think about.
For a bit of history, here's a lesson from the last time we were here with a bear market:
How much of your money would you like to lose?
Have you ever noticed that the "crooners" on Television never tell you to get out at or near the top, and call it a "buying opportunity" all the way down? Well gee, the last time they did this it only took 7 years before you were back to "even", and of course that's before price inflation ate up all your money.
Here's a hint kids, and this one's free - here's a long-term timing signal that, over the last 20 years, has never lost money.
This is a very simple timing signal that requires no more than 2 minutes a week to monitor and yet if you followed it over the last 20 years it has produced very few whipsaws and on balance has had you out of the market for all major bear trends and in the market for all major bull trends.
The use of this strategy is simplicity itself - you buy the SPY (or a S&P 500 mutual fund such as VFINX) when the 20 week moving average crosses the 50 week moving average by more than 1%, and you go to cash (or treasuries) when the 20 week moving average crosses the 50 week moving average in the downward direct by more than 1%.
The 1% threshold is to reduce whipsaws - typically, on a real trend change this only keeps you in the market (or out of the market) for another week or two beyond making the move right on the cross.
If you go back and look at the S&P 500 for the last 20 years, you have never been left out of a bull, or in a bear, if you followed this signal. Never.
Now you know what they say about "past performance does not equal future results", right? Its absolutely true, and your mileage may vary. This signal may stop working at any time, and it may start producing punishing whipsaws.
But over the last 20 years, it has performed insanely well.
If you are a long-term investor - for example, you're investing for retirement and have a 20+ year time horizon, you care only about beating the index over long periods of time. The magic of compound earnings takes care of the rest.
There's a nasty little secret that the market "crooners" will not tell you, but it is absolutely essential if you are to have any chance of beating the index over time - your total return must be measured against BETA, or risk!
That is, its easy for me to beat the index if I take lots of risk. Its also easy for me to lose a lot!
The nasty part of losses is that controlling them is absolutely essential. See, if you lose 50% you must then make a double, or 100% gain, to get back to where you were. For obvious reasons if you take big losses you're in deep kimchee, especially with your retirement money. Avoiding those big losses is absolutely essential!
So the key is to reduce beta while outperforming the index. And how does one reduce beta? One important way is to be out of the market, thereby taking zero risk, during bear markets!
Since the market is, on average, in a "Bull" about 75% of the time, if you are in cash the other 25% you will have a beta of 0.75 automatically, assuming the rest of the time you're in the index.
But you will grossly outperform the index since you will catch little of the big declines but most of the big advances!
Now you can pay some "managed mutual fund" to try to time the market and pick stocks, and likely underperform the averages, or you can use what you just learned, do it yourself, pay nobody any of those ridiculous fees, and you're odds-on to outperform those so-called "managers."
Oh, and while if you're investing in a tax-advantaged account (e.g. 401k or IRA) tax efficiency doesn't matter if your investments are in a taxable account this indicator is also extremely tax friendly, on average generating taxable events only once every three to five years, all at long-term capital gains rates.
One question raised on the forum is "why not use leverage and go into SDS when you get a sell and SSO on a buy"? My answer to that is simple - this is for long-term investors, not traders. If you're a trader then why would you follow something like this at all? The point of long-term investing is to build capital over time, not speculate!
Make up your mind what you are with what portion of your portfolio and act accordingly.
Oh, and on the "financial media" - if their purpose is to educate (and not obfuscate and/or simply screw you out of your money by getting you to buy when you shouldn't) then why is it that this - the most simple of indicators, yet one that has a 20 year track record of outperformance for long-term investors - is not covered? Yet you hear Kudlow every night talking about "investing for the long run."
What purpose does the financial media have again?
Something to think about.
posted by Genesis | 8:55 AM
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