Free Ebook.

Enter your email address:

Delivered by FeedBurner

« Six Signs that You're in the Middle Class | Main | Help a Reader: Moving in with Parents »

September 15, 2010


Feed You can follow this conversation by subscribing to the comment feed for this post.


You all make it sound so complicated, when it's quite simple. What no one is stating is a reasonable rate of return over the long term. What is your expectation with a Buy and Hold strategy, versus a Market Timing one, or a regular quarterly Rebalancing strategy based on age and risk?

I've been investing for over 25 years. I don't use Buy and Hold, except for a few stocks that pay high dividend yields, which make up about 10-15% of my total holdings. The only thing I hold at all times is Fixed Income Funds, which are now returning about 4.5%. I utilize market timing based on day to day volatility, but only with 10% of my fixed income fund at a time. When the market makes sharp moves, I go in and out of the index fund at 10% of the total value of my account. The strategy is based on the odds of the market going up or down 10 times in a row, which it rarely does. If the index is down over 1.0%, I buy. If the market is up the next day 0.25%, I sell. If it goes up the next few days, I might miss out on higher short term returns, but I make money. If the volatility is decent, I can make money as the index goes up or down on a weekly basis. The only time I don't trade, is when the market is flat, as it was this last week. Whatever I have in the index fund won't get sold until there's a good UP day. Whatever I have left in fixed income, I don't buy until there's a good DOWN day.

It makes not difference to me over the long term if a short spate of market timing is put on hold when I run out of stocks, or whether I my cost basis of all my index fund is higher than any present value. I just stop, wait, collect dividends, and put all monthly contributions into fixed income. After all, you never lose money until you sell.

History has proven over and over, that the short term (2 years or less) is very volatile, while the long term (20 years or more) is stable and based on growth of GDP and population. Who cares about the bubble? Who cares about the latest Great Recession? It's all short term. The goal should be to trade or re-balance actively enough to get that few extra percent return off of a fixed income fund (conservative), or a few extra percent off an index or stock fund (aggressive). If the overall performance of an index over the last 50 years was 9-10%, you could conceivably get a stable, year after year, return of 12-15%. You wouldn't participate in any "good" year like 1999, or lose anything in a "bad" year like 2001. In fact, short term political, economic, and social upheavals would have very little impact on your annual returns.

Losing less money is the same thing as making more money. Risking 10% of your cash on any one day to buy some fund, leaves 90% in the box to earn interest and dividends. It leave NINE more days to sell the rest of your cash, assuming there are nine down days in a row. That rarely happens, as does NINE up days in a row. If there's ONE day where the market is higher than the last 10% lot of fund you bought, you SELL it!. What happens is that the cost basis of your more expensive lots goes down, and you have 10% more cash to buy the fund back on a down day. I caution that you only make money when you can buy the fund back lower than the price of the last lot you sell. If you run out of cash and the market continues to go down...YOU DO NOTHING! If you sell all your lots at a small profit and you run out of index fund...YOU DO NOTHING! The fixed income cash at 100% is now earning interest, or the index fund (with a higher cost basis) is earning something and losing nothing unless you panic and sell. You could be out of the market for a YEAR, missing out 1999---but also taking profit in 2000, and missing out on 2001. Remember what you define as short and long term. I don't care what the market does between recessions. Recessions and Irrational Exuberance happen as a fact of life, usually a few years in between. I'm interested in my overall average ROI from age 25 to age 70. THAT's long term!

Furthermore, the global economy is changing, as Warren Buffet recently warned that investors going forward should reasonably expect 6-7% annual returns over the LONG term, rather than the historical 9-10%. If you are an extreme saver, your annual contributions early on in life will make the difference in returns insignificant (if you consider there's really any difference in happiness between having $2 million in retirement, or $3 million) I just want to retire early, and since I didn't get a good start, I'm having to catch up with some risky market timing combined with a mitigated risk of never going all in at any one time, and neither panicking or getting greedy with the rest of the "Greater Fools" I make money off of. All I want to do is make a few more percent than the historical average of the S&P500 over 50 years.

My annualized return in 1999-2000 was 12.6%

My annualized return in 2000-2001 was 11.5%

My annualized return from Sep 2009-present day is around 10%. I'm doing a little better year to date, but this flat market bothers me now.

No year I lost money in a panic. No year I made more than 15% trying to ride the rocket. It all averages out as I said over the long term.

People are right that Buy & Hold doesn't work, as are those that Market Timing doesn't work. You have to use a bit of both strategies to make more money than the average, but not much more. To me, making 3% more in a year on a balance of $1.7 millions is better than the 6-7% we are told to expect. Even a 50 year outlook is worth a little risk and daily attention.

"People are right that Buy & Hold doesn't work, as are those that Market Timing doesn't work."

I view these words as intelligent words.

The big picture here is that mankind's knowledge of how stock investing works is primitive today. We know some thing well, some things sorta/kinda and some things not at all. I love much of what the Buy-and-Holders contributed but I very much do not believe that they have it all figured out today. So I believe that we need to put aside dogmatism and listen to different people with different points of view.

Does timing work? Let's talk about it. Are stocks best? Let's talk about it. Do the conventional retirement planning rules work? Let's talk about it. Do the conventional asset allocation rules still make sense? Let's talk about it. Are stocks as risky as generally claimed, or less so, or more so? Let's talk about it.

We learn by talking things over. We need a national debate on this stuff. We shouldn't let a misplaced belief in things we thought we had settled in the past block us from learning new and important things on a going-forward basis.


The comments to this entry are closed.

Start a Blog


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.