Buy and Hold is Dead – Investment Models, Inc. (2024)

Avoid the Next Bear Market and Ride the Next Bull Up

“This is a trader’s market. It is not time to buy and hold large indexes or high-beta stocks and expect to be made whole over the next ten years. Hope is not a strategy. But waiting for the “shoe to drop” is frustrating, I know. However, that is the situation we find ourselves in.”

– John Mauldin

Buy and hold is dead . . . at least for now. This was the strategy for the last bull market which lasted from 1982 until 2000 where investors could count on buying a stocks or mutual funds that mostly went up over time.

But we’re not in Kansas anymore.

Two devastating bear markets since 2000 and the volatility index reaching all time high of 55 in 2008 signals a new era of investing. Many investors who were counting reaching retirement goals don’t have the luxury of time to ride out bear cycles-they’re time frame of 10 to 15 years requires a new approach.

Suddenly, marketing timing is not a “dirty phrase” anymore. In fact, market timing is coming back in style as individual investors saw their 401(k)s shrink to 201(k)s. The mutual funds and money managers charged them anywhere from 1% to 3% to lose a lot of money-while very few of them even attempted to sell and go to cash.

Buy and hold is dead . . . it died in the last Bear Market.

Understanding Market Timing

Most investors have no clue as to when it’s time to get in and when it’s time to get out of the market.

Take the current situation. On 1-19-10 the S&P 500 closed at 1,150.23 and on 2-8-10 it closed at 1,056.51. That’s adrop of -8.1%. That should have been the first clue that the trend had changed and that they should protect their investment base by either going to cash or at least entering stop losses.

But they hang in hoping that the market will go up. These are the same people who rode the last couple of Bear Markets all the way down, and some got out and did not ride the nice Bull Move up from the March lows, of 2009.

Buy and Hold Is Dead

Let’s take a look at what happens when investors use the Buy and Hold strategy and let’s look at it for the most recent 2 year and 10 year time frames. If we look at the year 2008 we know that the market sustained a severe drop while 2009 the market recovered a rather large percentage of that drop.

Let’s look at the last two years for the S&P 500.

Some might say that the Buy and Hold Investors had a good year in 2009, but it is clear that they would need another+31.8% gainto get back to the 1,469.36 level on 12/31/07. In this case you can’t look at just the recent year. Instead, you have to look at both years to see if the Buy and Hold Investors really had a good year in 2009.

But that doesn’t tell the whole story. On March 9th, 2009, the S&P500 hit a low of 666.79. That means that it lost 802.57 points or-54.6%from its price of 1469.36 on December 31, 2007, and it would have to go up+104%to get back to that year-end 2007 level.

I am sure that many investors got scared out and then may not have gotten back in at or near the March lows because of the fear of losing more money. Many more missed the up move.

My market timing kept me in the market from 3-18-09 and I was only out of the market for 37 days since 3-18-09. Personally, I do not like to ride out down markets. I like to get out as early as I can when the trend of the stock market starts down.

Sign upfor my RIX Market Timing Strategy and receive my Newsletters every Wednesday and Friday, and receive notifications on the precise day I issue a Buy or Sell Signal for the NYSE and NASDAQ. You might expect to spend $2,000 a year for an excellent Market Timing Strategy, my Annual Fee is $395

There is no way that I could hold on to an investment in the S&P500 while itdropped 54.6%. And I am sure that there are many Buy and Hold advocates who now feel the same way. I am sure that they do not want to ride out another Bear Market like we had with the Tech Bubble and the Real Estate Bubble. But it seems that they are told by their advisors that the Buy and Hold Strategy is the best way to invest in the long run, and they do not offer an alternative that includes Market Timing.

They won’t admit that “Buy and Hold Is Dead”.

Then let’s look at it for the 10 year period from 2000 to 2010. In a sustained up trending market, there are times when buy hold will outperform market timing. but in the past 10 years we have seen the market go through two major bear markets.

Now let’s look at the last 10 years for the S&P500

That means that investors who held their S&P 500 for the past 10 years have seen their investmentdrop by 24.1%. And they had to live with the emotions of being fully invested during two of the worst bear markets in history.

In fact, according to The Wall Street Journal, this last decade was the worst decade on record. It was even worse than the decade of the 1930’s during the Great Depression. There is no way to put a price tag on the emotional strain of seeing your investments go down for long periods of time.

Having a market timing strategy that takes you out of declining markets and keeps you in up markets removes much of the emotion involved in investing.

The stress and emotions of riding out a bear market are too much to take in order to be loyal to a strategy. It’s not possible to put a price tag on the value of avoiding those negative emotions, so one of the major benefits of market timing can’t be quantified.

“There are only two good feelings in investing. One is being in the market when it is going up, and the other is being out of the market when it is going down.”

– Jim Rohrbach

Expect the Market to continue to be volatile for many years.

I have been timing the stock market in real time for over 40 years. During that time the market has had 3 round trips a year. By that I mean that there have been 3 buy signals and 3 sell signals, on average each year. Sometimes the trend lasts a long time and other times it stays in a trend for a very short time. So I act on every change in trend because I know that it is the only way to get in early and to get out early, but insures me of getting in early in Major Up Moves and getting out early in Major Declines.

Investors have learned that it was not wise to get in late during tech bubble, and the recent real estate bubble. They sustained large losses if they bought into the market in the latter stages of the market rise. So this is a very legitimate question. But how does someone know when the market is reaching the level where it is unwise to get in. How do you know, if the market still has a long way to go to the upside?

In the recent big up move from the lows of March, 2009, the market remained in an uptrend throughout most of the entire year. So anyone who decided to get out too early would have missed a large percentage of the up move. So the basic question is, how do you know when the trend of the market changes direction?

It means that you need a reliable strategy that tells you when the trend changes. Without such a strategy then investors are left with trying to decide when they should be in the market, and when they should be out of the market by making educated guesses. It has been my experience over 40 years of timing the market that educated guesses really do not produce successful results.

I am frequently asked this question by investors. The question arises when we have been on a signal for some time before the subscriber is joining my service. The question is always the same. It goes something like this. You have been on a buy signal now for some time, should I get in now or should I wait for your next signal? This question raises a whole subset of questions that are very difficult to answer. One of the questions that this raises is, if I get in now will I lose money? Or is the market going to continue up from here or is it about to turn down? Subscribers, who have been with me for some time, know that I keep saying that it is impossible to predict the future course of the stock market. The market only gives us a one-day snapshot of what is happening.

The answers to those questions really can’t be made because they require predictions. My advice is always the same. If we are on a buy signal, the subscriber should buy and if we are in a sell signal, the subscriber should sell. I can say that because there isn’t anyone who can tell whether the market is going to continue in the direction or if it’s going to change the next day. If the investor says he is going to wait until the next buy signal, that decision negates the possibility of the market continuing up and missing that up move, and vice versa if the market is in a down trend.

The solution to these questions gets back to the fact that every investor needs a precise trend following strategy that tells them precisely when they should be in an up market, and out of and down market. The trend following strategy acts as a stop loss in an uptrend in the market, and it will tell the investor when to get in after a drop in the market.

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Market Timing Works

In order to have a successful market timing strategy, that strategy should be mathematically based and should be able to accurately pinpoint changes in the direction of the stock market. I have developed a strategy that converts the action of the stock market, every day, into a number that represents the trend for that day. The number is cumulative, so if the market continues up that number will increase and vice a versa.

If you can calculate a numeric value on the trend of the market, then it becomes rather simple to identify turning points.

In the case of my RIX® Index, I look for the readings of+12.0trigger a buy signal on the New York Stock Exchange and a-12to trigger a sell signal. For the NASDAQ, I look for+6.0and-6.0for buy and sell signals. The reason the NASDAQ numbers are lower is because of the higher volatility in the NASDAQ. So when I see a+12.0or+6.0. I issue Buy signals. Those signals stay in place until I see a-12.0or-6.0. The RIX® can go as low as-11.9or-5.9and I still do not issue a signal.

It has been my experience over the years that the market can get down to those numbers and then rebound to the upside. This eliminates many of the false signals when the market has small corrections. It is important to avoid as many whipsaws as possible because investors do not want to be getting in and out of the market frequently. This also provides investors with precise buy and sell signals to act on that reduces the stress of trying to determine when they should be getting in and out of the stock market, and thus eliminates a lot of stress and fear, and that might cause them to take inappropriate action. Many investors stay too long in a down market, and many miss an up move by waiting too long to get in. This mathematical strategy helps eliminate confusion and the fears of investing.

Different ways of market timing

There are many different ways of timing the stock market. But the person who decides to do it on their own should be prepared to do a lot of homework. There are great services available today that allow you to analyze the overall market and individual stocks. And of course there are books on the subject too.

I think John Murphy is recognized as one of the best technicians in the country and has written books on the subject.

StockCharts.com would be an excellent place to get started. As a starting point the average investor could take a look at his investments in the market using exponential moving averages (EMA). The length of time used in the average will determine how frequently you will get signals. Some recommend that you use 150 day EMA or 50 day EMA, and I say they are too long.

You have to wait too long to get a buy or sell signal, and in a down market you could lose a large chunk of your investment base. In an up market you would have to wait too long to get in, and therefore miss a lot of the up move. Keep it simple. I’d say you should start with nothing higher than the 30 day EMA. You can then use the charts on StockCharts.com or BigCharts.com and spend some time on weekends looking at various EMA’s to see what suits your risk tolerance. Timing the overall stock market is a bit more complex. I use a complex mathematical formula for this.

Some investors like to get in and out frequently, while others prefer to stay a little longer time. And that can be done by shortening or lengthening the EMA. It’s not complicated and you will get a high level of satisfaction doing it yourself. If it ‘s not fun doing the analysis, then you need to find a market timer who has a long track record and subscribe to his service.

Large Funds, Investment Banks and traders use market timing all the time.

Unfortunately, we are not allowed to go into the back rooms of the major banks and big time traders, but I think it’s safe to say they have people in those back rooms using market timing strategies to determine when they should be investing.

I have never seen a large bank, mutual funds, or big time trader tell the world what they are doing. And I know that if they have a successful market timing strategy, they are not about to release that to the public.

One thing that is certain is the fact that if too many people act on the same signal at the same time, it will affect the market. And I am convinced that is the reason why major brokerage firms never tell their clients when to buy or sell, and they continue to tell the world that market timing can’t be done. I am sure those PhD’s and mathematicians in the back room are coming up with strategies that are intended for the exclusive use of their firm. So I guess we’ll never get to see those market timing strategies.

Why Wall Street doesn’t want Main Street to know about market timing

If you listen to the major brokerage firms, they will tell you that the market cannot be timed. I am sure you can come up with some reasons why these firms say that market timing can’t be done.

One main reason for this position is that even if they had an accurate trend following strategy, they couldn’t tell all their subscribers or clients when they had a signal to either buy or sell, because of the large numbers of people who would act on those signals. I’m sure you realize that if a major firm told the world that they have a sell signal on a Friday that the market will go into a major fall and vice versa.

I am also sure that some major investment firms have a policy that prevents their employees from advising clients to use market timing. They will tell clients how bad Bear Markets are, but they do not tell their clients how to avoid them. They do tell clients to use “Asset Allocation” and “Buy and Hold”. But we know that those strategies do not work in Bear Markets. There are also some very good traders who have a good strategy for knowing when to buy and sell. But these traders use their own strategy, and they are not willing to share with the average investor. So the actual number of advisors that you can follow to obtain an excellent trading strategy is very limited. It has to be limited because, if any one advisor had too many people following his signals, he could affect the market, when he issued a buy or sell signal.

There is a large group of market timers who really do not have a precise mathematical strategy, but rather base their advice on when to get in and out of the market based on their predictions. Personally, I think that trying to project the future course of the stock market is a fool’s game, and I do not make or listen to predictions. I let the mathematics of my strategy determine when the trend of the market changes direction. And since it’s a mathematical, the decisions are unemotional.

So I can say that for the past 40 years I have been a “mechanical investor”. By that, I mean, I act on the signals from my trend following strategy without question, and without emotion. If you can become a “mechanical investor”, and if you are willing to accept and act on the trend following signals produced by your strategy, you will find that it will reduce or eliminate the fears and emotions involved in investing, and you will also probably find it easier to sleep.

So if you agree that it is very important to have a trend following strategy, the question becomes how to obtain a strategy that has been tested in real time for many years. Well we know that you can’t obtain it from a Major Brokerage Firm or from professional traders who are very successful, because they keep their strategy for their own personal use. I know that it is very hard to find a timer who is an excellent timer, and whose mission is to help the average investor and who charges a nominal annual fee.

Why it is tough to make money in Down Markets

a. Taking losses

There are risks every time someone invests in the stock market. The risks can be reduced by a good market timing strategy, especially if that strategy gets the investor out of market early in the down move. This puts the investor in a position to buy back in the lower prices. And this is the key to success for a successful trading approach.

There are many investors out there who lost as much as 50% of their life savings in the recent bear market. This means that they will have to get a return of 100% to get back to even, while those investors who had a trend following strategy got out and put their money aside waiting for the up move, which means they are better positioned to increase the their portfolio.

One of the most important actions is to take small losses in down markets. Some investors stay invested too long because they think the market will go back up, if they get out. All we have to do is look at what happened when the Tech Bubble burst in 2000. On 3-5-00 the Nasdaq Composite Index closed at 5,048.62 and it closed on 12-31-09 at 2,209.15. That means that this index would have to up229%to get back to the value that it was 10 years ago. On 3-9-09 the Nasdaq closed at 1,258.64; I’ll let you do the math on that one.

It is always harder to trade successfully in a falling market.

It is always harder to trade in a down market, because when people lose money their emotions become much stronger and sometimes influence decisions that they wouldn’t have made if they were not losing money. There’s a natural tendency on the part of many investors, when the market is going down, to think that if they got out the market it would go right back up and they would miss the rebound. Rarely do they think about how much more they will lose if they continue to ride a position to the downside.

We saw that in 2008 when many investors rode their entire investment portfolio down and lost upwards of 50% of their life savings. So it takes a strict discipline to minimize losses by getting out early in the down move. That is why it’s so important to have a market timing strategy that overcomes those emotions.

If you have a reliable market timing strategy, and you listen to the signals and act on those sell signals, you can reach the point where you will become a mechanical investor. By that I mean, you will act on the signals and not let your emotions and into the quotation. Granted this may be difficult to achieve.

But if it is achieved, you will become a successful investor, because you will get out early in a down market, and you will get back in early in an up market. You won’t question the mathematics of the solid market timing strategy that you have tested over a long enough period of time to know that it can be trusted and used successfully.

Ride Good Investments All The Way Up

When the stock market is in its sustained up move it is important to ride the move all way. Many investors get excited when they have a small profit they have a strong desire to take a profit. At these times it’s much better to stay fully invested while the trend of the market is up.

Staying in the market in an uptrend also requires a discipline. It becomes a problem when someone takes a profit and the market keeps going up, because they don’t know when to get back in and they can miss a large portion of the up move. Once again, they fear that if they get back in the market will turn down. There’s really only one way to overcome those fears and that is to have a disciplined approach to investing. You have to know when the trend changes, and not act on how you feel about taking a profit or taking a loss.

When your money is in the market, the emotions become stronger than they are if you were just observing the market or if you are testing a theory and not using real money. So once again having a solid market timing strategy reduces those emotions for the investor who is making decisions based on a tested strategy, rather than on emotion. Big up moves do not come along too often so you have to maximize those opportunities. And fortunately, as we have seen in the last bear market, big down moves do not come along very frequently, and we have to avoid as much of those down moves as possible.

You make your most money in big bull market runs -can’t afford to miss them

It’s very important to stay invested while the market is in an uptrend and capture as much of the up move as possible. Large up moves do not come along very frequently, and therefore it’s very important to take full advantage of the up move. It is also very important to not stay too long in the down trend, because the investor can lose a large portion of their investment base by staying too long. Real success in investing comes from letting your profits run and cutting short your losses, and the only way to do that is to have a trend following strategy that tells you precisely when you should get in, and more importantly when you should get out of the stock market.

The question “should I get in the market now?” gets a bit more complicated when the person asking the question has been out of market for a considerable length of time. For example, if someone did not participate in the up move in the market from the March lows of 2009 to December 2009, you have to ask why that person stayed out of the market for such a prolonged period. I think I can answer that, because I think it has a lot to do with fear.

As the market moves up some investors become fearful that if they get in after the up move, the market will turn down and they will lose money. So they sit on the sidelines waiting for a correction, hoping that they can get in at a lower price. But if that correction comes, they again become fearful that the market will continue down. And again they become locked out by their fears.

The March lows 2009 created the “buying opportunity of a lifetime”. But that buying opportunity carried with it a major load of fears. At the time, all we heard was that the market was going into a major fall and that we were going into a depression. And, in fact, the market had sustained a major drop, so the people were afraid of losing more money, instead of looking at it as an opportunity to make money. And that’s where the a trend following strategy came in, because if it is mathematical, it would have issued a buy signal in mid-March, and it would have kept them in the market for most of the up move from March until December.

My investment strategy kept me in the market for all but 37 days from 3-17-09 to 12-31-09. If we listened to the signals we can strip out most of fears that accompany decisions to invest in the market. And the Signals will get us in early in an up move, keep us in, and take us out before a major down move.

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ETF’s and other funds make it easier to participate in market timing

I personally like to have my investments spread over many stocks. Therefore, I use the S&P 500, either in the form of mutual fund or an ETF. I believe that if you want to become a successful investor, you need to make sustained gains and keep those games. For those who like to play the individual stocks, I say you should use a small percentage of your investment base.

Then use the bulk of your money in an investment vehicle that spreads your money over many stocks. You can use ETF’s like Spiders, Diamonds, QQQQ’s or mutual funds that invest in the S&P 500 or the Dow. My favorite mutual fund families are ProFunds and Rydex, because they do not charge any fees. They have no redemption fees. They don’t care if you stay in a day, a week, or a month, and I believe that’s the way mutual funds should treat investors.

Putting Market Timing to Work For You

If you have sustained larger losses in the recent bear markets or if you have not participated in the large up markets that followed those bear markets, you know that you have to do something to change your strategy. Unfortunately, most professionals will not tell you to use market timing. They tell you that it can’t be done and that you have to use the” buy and hold strategy”.

But your experiences have told you that you have to do something to prevent taking big losses in the future and to help you participate in the large up markets. Regardless of what the professionals say, the solution to the problem is market timing.

Here’s a five step plan to help you accomplish that goal.

1. Find a right market timing plan. This is the most important part of the solution, but it is also the most difficult thing to do. Most market timers do not provide precise metrics that tell you exactly when the trend of the market changes. Many use historical precedent or they make predictions about the future course of the stock market.
2. Once you have a reliable market timing strategy. The second thing need is a vehicle that spreads your investment over many stocks so that you do not get hurt by owning a stock that gets hit hard in a down market. I recommend that you use an ETF or mutual funds that tracks the S&P 500 because the S&P 500 tracks perfectly with my RIX Signals.
3. Do not try to time the exact bottoms or the exact top. That can’t be done. The best that you can hope for is to get in the market after it starts up but near the bottom, and get out after the market starts down but near the top. My Rix index has been doing that for over 40 years. I provide my subscribers with Weekly Newsletters that show them the precise daily readings of my RIX Index, and I notify them on the day I issue a Buy or Sell Signal. So nothing is left to guessing.
4. Once you have the strategy in place. It will take the emotion out of your investment decisions, if you follow the signals. When you become familiar enough with the strategy, you will eventually become a mechanical about your buys and sells, and you will become what I call a “Mechanical Investor”. Once you reach that status, you will find that investing is relaxing, and you will enjoy the stock market. You will also sleep much better, and you won’t have to worry about looking at your financial statements.
5. So relax and enjoy.

I am tracked by Timer Digest who tracks over 100 market timers, and I am frequently listed by them as one of the Top Ten Timers in the country. They have been tracking my performance since August 2001. Because they track me, I am also able to see what the other timers are doing. I find it very interesting that I can’t seem to find any other timers who come close to identifying changes in the trend when I do. So I do not know how they calculate their timing strategies.

But I do know that my strategy has pinpointed the intermediate changes in the trend of the stock market for about 40 years. It has worked for me and I am willing to share it with other investors. I put my money where my mouth is and I tell my subscribers when I get in the market and when I get out. I also tell them what I am investing in, for my personal account. I do not believe that most of the other Registered Investment Advisors share this information. Anyone who decides to sell a trend following strategy only has to meet one condition. They have to be right or they will be out of business.