How We Eluded The Bear Of

The date October , will forever be embedded in my mind. It was the day after our mutual fund trend tracking indicator had broken its long-term trend line and I sold % of my clients invested positions (and my own) and moved the proceeds to the safety of money market accounts. Some people thought we were nuts, but I had come to trust the numbers. The shake out in the stock market, which started in April , had all major indexes coming off their highs, violently followed by just as strong rally attempts. The roller coaster ride was so extreme that even usually slow moving mutual funds behaved as erratically as tech stocks. By October, the markets had settled into a definable downtrend, at least according to my indicators. We sat safely on the sidelines and watched the unfolding of what is now considered to be one of the worst bear markets in history. By April the markets really had taken a dive, but Wall Street analysts, brokers and the financial press continued to harp on the great buying opportunity this presented. Buying on dips, dollar cost averaging and V type recovery were continuously hyped to the unsuspecting public. By the end of the year, and after the tragic events of , the markets were even lower and people began to wake up to the fact that the investing rules of the s were no longer applicable. Stories of investors having lost in excess of % of their portfolio value were the norm. Why bring this up now? To illustrate the point that I have continuously propounded throughout the s; that a methodical, objective approach with clearly defined Buy and Sell signals is a must for any investor. To say it more bluntly: If you buy an investment and you dont have a clear strategy for taking profits if it goes your way, or taking a small loss if it goes against you, you are not investing; you are merely gambling. The last -/ years clearly illustrate that it is as important to be out of the market during bad times, as it is to be in the market during good times. Want proof? According to InvesTechs monthly newsletter it turns out that, measuring from to , if you started with $ and you followed the famous buy-and-hold strategy, that $ would become $,. If you somehow missed the best months, your $ would only be $. However, if you managed to miss the worst months, your $ would be $,,! Thus, my point: Missing the worst periods has profound impact on long-run compounding. There are times when you end up better off by being out of the market. Interestingly enough, if you missed the best months and the worst months, your $ would still be worth $,, which is % higher than the buy-and-hold strategy. This all comes about because stock prices generally go down faster than they go up. Wall Street and most people tend to overlook the value of minimizing loss, and that is exactly why the bear demolished more than % of many peoples' portfolios while I and those who trusted my advice escaped the worst of the beast's rampage.