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Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
|
|
World |
U.S. |
|
Nasdaq
100
(QQQQ)
|
Russell
2000
(IWM)
|
S&P
500
(SPY)
|
|
The Nasdaq 100 (QQQQ), Russell 2000 (IWM) and S&P 500 (SPY) respectively gained 1.07%, 0.85% and 0.53% over the five-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio underperformed
its U.S. counterparts this week as it posted a 0.28%
loss. The portfolio consists of the 5 top-ranked world ETFs
as of February 26, which marked the beginning of the current
4-week holding period. The World portfolio
is being rebalanced today, as the current 4-week holding period
is now over.
Our current Buy
signal remains in effect.
The vast majority of investment advisors and brokers preach
the wonders of buy-and-hold. It is industry doctrine and much
print is devoted to convincing clients that buy-and-hold is
the only rational approach to investing. As trend-timers we
have largely rejected the buy-and-hold mantra of the investment
industry. But why do we reject it? This week, we'll explore
some of the more common arguments presented to support the buy-and-hold
investment approach and our contrarian view of those arguments.
Buy-and-hold argument 1: despite the ups and
downs, the stock market generates a significantly positive return
over time. Investors should stay invested for the long-term
and take advantage of this natural tendency for stocks to go
up as the economy grows.
This is certainly true. Stocks DO tend to go
up over long periods of time. The chart below shows that over
the past 100 years, stocks have generated an average annual
return of about 10%. The chart also shows the variation in returns
over various rolling periods of time. For example, over any
10-year period, stocks have almost always delivered a positive
return with some 10-year periods offering almost a 20% return.
Of course, stocks just concluded a rare "lost decade"
where the return was negative. Over any 20-year period, stocks
have never given a negative return. Hopefully, that statistic
continues.
Chart 1: Range of Stock Market (Dow) Returns (for holding
periods from 1 to 100 yrs)
If an investor is now 20-30 years old and has decades of investing
ahead of them, perhaps there is some comfort to be taken in
these long-term averages. However, if an investor is recently
retired without enough resources to last, they can ill afford
a 10-20 year period of single digit annual returns. In summary,
the stock market delivers a solid return over long periods of
time. But those returns can vary dramatically over shorter periods
of time, even to the point of being negative for entire 10-year
periods. Having just gone through such a "lost decade",
it seems highly unlikely such performance will be repeated,
however.
Buy-and-hold argument 2: missing the 10 best
days in stocks dramatically reduces returns. Thus, investors
must stay the course in order to be present for these critical
days.
This argument is trotted out frequently to support buy-and-hold.
And the data can look pretty compelling. To whet our appetite
for buy-and-hold riches even more, let's take the most recent
secular bull market from 1984-2000, a period where stocks offered
an enormous 17.89% annual return. $100 invested at the beginning
of 1984 would have grown by almost 14x by the end of 1999. So,
what's the impact of missing the biggest up days? Table
1 below shows the impact of missing not only the best
10 days; but extends that to the impact of missing the best
20 days, best 30, and 40 days. The effect is dramatic. We obviously
cannot afford to miss those key days.
Table 1: Missing best days impact
Number
of Trading
Days Missed
|
Miss
the
Best Days |
"Lost"
Annual Return |
0
days |
17.89% |
None |
10
days |
14.24% |
-3.65% |
20
days |
11.99% |
-5.90% |
30
days |
10.01% |
-7.88% |
40
days |
8.23% |
-9.66% |
Okay, it's obvious that missing large up days damages returns.
What is usually missing in this argument is the other side of
the coin: What if you miss the WORST days?
It turns out the impact is far more dramatic than missing the
best days.
Table 2: Missing best days versus missing worst days
Number
of Trading
Days Missed
|
Miss
the
Best Days |
Miss
the
Worst Days |
10
days |
14.24% |
24.17% |
20
days |
11.99% |
27.04% |
30
days |
10.01% |
29.45% |
40
days |
8.23% |
31.66% |
Chart 2: Growth of $100 from 1984-2000
Almost every investor has heard the story of missing the 10
best days. How many have heard about missing the 10 worst days?
And the data above was during the longest running Bull market
of our generation. A period when buy-and-hold generated outstanding
returns. Even during this stellar stock market period, the benefit
of avoiding losses to preserve capital for future gains is abundantly
clear.
Buy-and-hold argument 3: You can't time the
market. Just look at the dismal performance of professional
mutual fund managers! As a group, they underperform the market
over any extended period of time. If the best minds in the investing
world cannot beat the market, why would you, Mr/Mrs Individual
Investor, think that YOU can do it?
This one we won't spend much time on. Many of the articles espousing
this view focus on timing the market from one day to the next,
which misses the point. Timing the market on a given day is
not what any trend following strategy attempts to achieve. We
think it's ludicrous to believe you cannot time markets. We
acknowledge that it's impossible to consistently call the tops
or the bottoms. But that's never our intent. We simply argue
that taking a passive buy-and-hold approach to investing is
a disaster in a secular bear market such as we are in. The data
above shows that, while not a disaster, being mindful of avoiding
losses even during a strong secular bull period can improve
results handsomely. We feel that our results speak for themselves,
and offer a very strong endorsement for the benefits of preserving
capital and building wealth through a trend timing philosophy.
Our weekly updates are filled with tips, pointers,
and methods for successfully implementing and making the most
of our approach to investing.
Buy-and-hold has its place for investors who do not have the
knowledge, capability, or resources available to pursue any
other strategy. But with the advent of discount brokers and
the vast information available on the internet, excuses are
far fewer than they once were. Spread the word: there are better
ways to invest! You need not rely completely on the generous
spirit of market forces to deliver your returns. After all,
we have seen that the market can be anything but generous.
Very recently, Direxion Funds added a new twist to the world
of leveraged fund investing. With their release of monthly leveraged
funds, Direxion is attempting to respond to the naysayers who
complain that leveraged funds fail to properly deliver the 2x
returns they espouse. We have written many times about the impact
of negative compounding on funds and ETFs that seek to provide
leveraged returns on a daily basis. It's just the math people!
It's not some grand failure of the ETF or fund providers. And
the gap in expected performance only occurs over months-long
timeframes, OR when volatility is excessive (as it was in late
2008). Anyhow, Direxion's monthly funds try to get around these
concerns by NOT delivering daily leveraged returns. Instead,
they focus on providing the 2x return on a monthly basis. This
makes the potential impact of negative compounding much less
of a concern. The downside, if you will, of this approach is
that the fund may not deliver the expected return on a DAILY
basis. But the results are pretty close as shown in the Chart
3 below. You can see that the monthly leveraged fund
will occasionally fail to keep up with the daily leveraged ETF.
But that gap is quickly closed. Anyhow, for those of you concerned
with the effects of negative compounding and willing to invest
in funds rather than ETFs, Direxion has an answer for you to
consider.
Chart 3: DXRLX
and UWM
comparison
Warm wishes and until next week.
The TimingCube
Staff
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Turbo Model
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Classic Model
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