• In the long run markets always go up
• Markets spend more time in bull markets (average duration is 40 months) than bear markets (average duration is 9 months)
• Taxes are lower (all capital gains are long term by definition)
• Costs are lower (no trading, no transaction fees)
• Good stock picking is key to long term returns
• Portfolio diversification is the key to reducing risks
• Market timing does not work

We always point to our published results to defuse the "market timing does not work" argument, but because of who we are, our opinions are tainted. It turns out that well respected services like the Hulbert Financial Digest have been demonstrating for years that there are plenty of timing systems that have consistently beaten the markets (and therefore beaten Buy and Hold) for long periods of time.

Truth be told, there is no true Buy and Hold anymore.
From the initial passive management approach, brokers and advisors have had to make some serious philosophy concessions in their efforts to compensate for the strategy's weaknesses. Despite the best initial stock picking, things change. Individual companies can have problems, go out of favor, or even shut down.
So the passive management has given way to active management.
Then, as a tacit admission that the risks during bear markets were too severe, the concept of asset allocation came to be. Instead of risking your entire nest egg in the stock market, the common investment wisdom suggested to place a portion of your assets in other investments such as bonds because they are not affected by stock market vagaries. The direct result of such asset allocation is that you guarantee average results.
The next logical step was to start shifting the allocation in and out of stocks to improve performance. Only heretics would dare call that market timing! The fiddling with Buy and Hold has not stopped and sector rotation, moving in and out of cyclical stocks, currencies, and other techniques are being used extensively. For the masses, much of this active management and asset allocation shifting game has mostly gone un-noticed because the industry invented mutual funds. Mutual funds were the ideal vehicle which allowed brokers to sell the Buy and Hold concept, while under the covers, the money managers shift and time like there is no tomorrow in an attempt to beat their peers and the market at large.

Studies conducted over decades have concluded that with true Buy and Hold investing, if you hold your stocks for 10 years or more you will approach the historical annual returns for the market as a whole, around 11%. But if you hold the stocks for a year or less, the chances for you to lose money are very high.

In the end, the killer arguments against Buy and Hold, and supportive of market timing, are the losses incurred during bear markets and the time it takes to breakeven afterwards.
Looking at the 13 bear markets between 1929 and 1997 (since we are still a long way from breakeven we excluded the 2000-2002 bear market), the Buy and Hold investor would have lost an average of 39% and waited an average of 5.2 years to recoup her/his money.
And if that sounds awful, how about an 87% loss and over 25 years to breakeven? That's what the 1929 crash did to the faithful Buy and Hold investor.

In order to illustrate the Buy and Hold effect with a more contemporary example, we take a look at the Nasdaq Composite over the last 5 years. The chart below clearly shows how the Buy and Hold investor would have lost 74% from the September 2000 peak to the October 2002 bottom. Today that investor is still down over 52% from that peak, and down over 20% for the 5-year period.

So it seems like the prerequisite qualities for a Buy and Hold investor are patience and a high tolerance for temporary losses. Both in much higher doses than required of a Trend Timer.

In contrast, Trend Timing is really a modern version of Buy and Hold that could have been called Buy, Hold and Preserve. We really want to be invested all the time with all of our serious money, and as it turns out we are in a Buy mode most of the time (77%). The main reason we ever issue Sell signals is to protect our assets against large losses with our Long Only strategy, or boost our performance by exploiting down trends with our Long and Short strategy.

• The most important ingredient in investing is time. The sooner you invest, the larger your long term gains
• There always will be doubts and clouds over the market, and if you don't do it today, you are likely to put it off for a long time
• We never know how long a signal will last; you could be sitting in cash much too long
• If the current signal is showing gains, nothing says they are not going to double before the next signal
• During a Buy signal, "buying the dip" is generally good
• During a Sell signal, "shorting the bump" is generally good
• If a current signal is in the red, we are that much closer to our protective Cash signal, reducing the potential loss

To mitigate the risk of a mid-signal entry we always recommend dollar cost averaging, see If after you invest the current signal ends-up being a loss, you keep going satisfied that our overall 80% winning trades ratio is still something most investors, individuals and professionals alike, are still dreaming about.

Warm wishes and until next week.

The TimingCube Staff