TimingCube - The value of setting realistic expectations - realistic expectations,reasonable expectations,counterproductive,frustration,disappointment

Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

The power of words! After hitting new 2 1/2 year highs on Monday, market indices retreated sharply on Wednesday, thanks to the Federal Reserve. Prior to Wednesday's meeting, the Fed had said that it could hold interest rates steady "for a considerable amount of time". It now says that "it can be patient". This slight change in Fed speak apparently unnerved investors and triggered a wave of profit taking that knocked almost 90 points off the Nasdaq Composite before the markets started to recover on Thursday afternoon. For the week, both the Nasdaq 100 and the Russell 2000 lost about 2.50%. The S&P 500 did comparatively better and only lost 0.91%.

Despite this week's pullback, our current Buy signal remains in effect.

Trend Timing School

The value of setting realistic expectations

Investors, by and large, tend to be pretty greedy, and as long time Trend Timers we have gotten very spoiled with the gains our Model delivered over the last few years. However, assuming that such lofty returns can be achieved year after year is unreasonable, and ultimately counterproductive.
Why are unreasonable expectations counterproductive?
The simple reason is that, time and again, they lead to disappointment. In addition to frustration, disappointment breeds doubt or even distress, which in turn brings about the number one cause of investor underperformance: strategy hopping, which happens when you start chasing the last winning strategy, advisor, or investment.

Historical returns for the U.S. stock market have remained essentially unchanged over very long periods of time. In the recent past, from 1990 to December 2003, the S&P 500 average annual return was 10.93%. From 1926 through 2003 it was about the same, at 10.42%. The Nasdaq 100 has performed substantially better with an average annual return of 22.62% over the last 15-years. It also lost 30% plus per year for three years in a row!
While historical averages may perhaps serve as a useful guide for establishing long-term future expectations, we must recognize that over short or even extended periods of time, returns will deviate substantially from these averages, as investors experienced during the wild ups and downs of the last few years.

Why is it then that some of us felt short changed when during 2003 our Long & Short strategy applied to the Nasdaq 100 index returned "only" 38%?
Yes, over the entire 15-year span over which we tested our Model, the average yearly return was about 58%.
Yes, the bubble forming and deflating years between 1998 and 2001 produced extraordinary 100% plus yearly gains.
The truth is that it is unwarranted to expect that such exceptional market conditions and returns repeat consistently every year. During the 15-year stretch, there have been years such as 1992, 1993, and 1994 that returned relatively lack-luster performances of 17%, 12%, and 10% respectively. Relatively lack-luster, because they were nevertheless solid Buy and Hold beating performances.

So what are reasonable expectations?
A goal of beating the market over longer periods of time is a tall order for most investors, or even professional money managers, but we consider it reasonable with our Trend Timing Model. Each of us needs to go through the exercise and articulate the average yearly return we believe can realistically be achieved. That figure is different for each of us because some are conservative and others aggressive, our risk tolerance varies, and our preferred indices and investment vehicles are different. For example, if one follows the S&P 500 and related investments, maybe a target of 15% to 20% on average is attainable. Following the Nasdaq 100 that figure might be 30%.

Regardless of the goal we set we must always remember that a single year is too short a measure for long term investing, and that all the yearly numbers discussed here are average figures. We understand that some years can substantially deviate from the average, up or down. Proper expectations and understanding lead to satisfaction and the peace of mind of knowing that our wealth building plan is on track and doing just fine.

FAQ of the Week

Question: Where can I find information such as closing prices and volume, historical prices, charts, or investing answers in general?

The Internet provides us with previously unmatched information resources and tools to find the very specific data or answers we seek. Many get overwhelmed with the sheer quantity of information available and get lost searching for the right source. This FAQ provides a short list of sites we find very useful and should be book marked by every Trend Timer for future reference. It goes without saying that for each type of information and site listed here, there are many more to be found.

Current and historical closing prices and volume data: Yahoo! Finance
This site has loads of information but in particular we like it to obtain price quotes for all investment vehicles we list on our site.

Charting and other Technical Analysis tools: BigCharts and StockCharts
A graphical representation of what's happening over time often reveals the "big picture" and helps many of us step back from the daily snapshots. Our Weekly Trend Timing School editorials mention some Technical Analysis tools which can be found and plotted on these sites. A good example is the Exponential Moving Average (EMA) we introduced in the issue.

Investment basics, dictionary, and tutorials: Investopedia.com and The Investment FAQ
Our Web site presents the fundamentals of Trend Timing but for broader general investment knowledge and education, you need to consult the vast resources of these investment sites.

Warm wishes and until next week.

The TimingCube Staff