The date October 13, 2000 will forever be embedded in my mind. It was the day after our mutual fund trend tracking indicator had broken its long-term trend line and I sold 100% of my clients' invested positions (and my own) and moved the proceeds to the safety of money market accounts. Some people thought we were nuts, but I had come to trust the numbers.
The shake out in the stock market, which started in April 2000, had all major indexes coming off their highs, violently followed by just as strong rally attempts. The roller coaster ride was so extreme that even usually slow moving mutual funds behaved as erratically as tech stocks.
By October, the markets had settled into a definable downtrend, at least according to my indicators. We sat safely on the sidelines and watched the unfolding of what is now considered to be one of the worst bear markets in history.
By April 2001 the markets really had taken a dive, but Wall Street analysts, brokers and the financial press continued to harp on the great buying opportunity this presented. Buying on dips, dollar cost averaging and "V" type recovery were continuously hyped to the unsuspecting public.
By the end of the year, and after the tragic events of 911, the markets were even lower and people began to wake up to the fact that the investing rules of the '90s were no longer applicable. Stories of investors having lost in excess of 50% of their portfolio value were the norm.
Why bring this up now? To illustrate the point that I have continuously propounded throughout the 90s; that a methodical, objective approach with clearly defined Buy and Sell signals is a "must" for any investor.
To say it more bluntly: If you buy an investment and you don't have a clear strategy for taking profits if it goes your way, or taking a small loss if it goes against you, you are not investing; you are merely gambling.
The last 2-1/2 years clearly illustrate that it is as important to be out of the market during bad times, as it is to be in the market during good times. Want proof?
According to InvesTech's monthly newsletter it turns out that, measuring from 1928 to 2002, if you started with $10 and you followed the famous buy-and-hold strategy, that $10 would become $10,957.
If you somehow missed the best 30 months, your $10 would only be $154. However, if you managed to miss the 30 worst months, your $10 would be $1,317,803! Thus, my point: Missing the worst periods has profound impact on long-run compounding. There are times when you end up better off by being out of the market.
Interestingly enough, if you missed the 30 best months and the 30 worst months, your $10 would still be worth $18,558, which is 80% higher than the buy-and-hold strategy. This all comes about because stock prices generally go down faster than they go up.
Wall Street and most people tend to overlook the value of minimizing loss, and that is exactly why the bear demolished more than 50% of many peoples' portfolios while I and those who trusted my advice escaped the worst of the beast's rampage.
About The Author
Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped hundreds of people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: www.successful-investment.com; ulli@successful-investment.com
Stock trading remains a very competitive field and the stock... Read More
Now that you have some money burning a hole in... Read More
Ever jumped out of an airplane? It's OK if you... Read More
If you were to find that you had some severe... Read More
I am sure that if you have a brokerage account... Read More
Spread trading is a technique that can be used to... Read More
If you go to Haiti or other places in the... Read More
Every stock market investor faces one primal enemy. An enemy... Read More
It depends on your level of understanding of the market... Read More
For the year 2000 we have seen hundreds of mutual... Read More
It looks like we have now entered a new bull... Read More
As I said in Part I everyone in the insane... Read More
Wouldn't it be nice if you were only in the... Read More
After finding the price of a particular stock, usually the... Read More
For years investors have been taught to look into the... Read More
Whenever I see mutual fund comparisons in the trade publications... Read More
I often play a little game with myself when I... Read More
Over the past few months, several investment professionals have brought... Read More
(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More
I don't know what kind it is, but I saw... Read More
Most advisors will tell you they can beat the market.... Read More
When it comes to buying a stock or mutual fund... Read More
Wall Street's watchword has always been diversification, but what does... Read More
Most people think the stock market is a zero sum... Read More
Most stock traders know that momentum trading can be a... Read More
In his wonderful book, 'Multiple Streams of Income', best selling... Read More
As GuruFocus updates the stock buys and sells of gurus,... Read More
You have decided to buy some stock or mutual funds,... Read More
Profitable day traders recognize that momentum trading is among the... Read More
Stocks breakout from properly formed bases everyday but many investors... Read More
Congress recently passed another new law that is supposed to... Read More
One of the great truisms of Wall Street is "Don't... Read More
Before you embark upon a journey of trading stocks or... Read More
Over the past few months, several investment professionals have brought... Read More
Sometimes the best way of lowering exposure to risk is... Read More
Picture one of those clubs where only the real heavyweights... Read More
If you have a pension plan at work you will... Read More
All of the talking heads have been telling us that... Read More
Options trading can increase the profits you make when trading... Read More
Just 30 years ago the stock market was a shadow... Read More
Minority Report the movie may not be far off if... Read More
You remember the story about the frog that was put... Read More
Three little pigs went to the market to stock up... Read More
Stock trading can be a very profitable activity. You can... Read More
How do you invest? What do you really pay? At... Read More
Ever notice how behavior in one area of life can... Read More
An investor can find and research the best stock on... Read More
THERE'S SOMETHING TO BE SAID FOR standing firm in the... Read More
The stock market has been going up for more than... Read More
One Saturday morning, while he was sitting at his computer... Read More
Reach in your pocket and take out that big roll... Read More
Wouldn't it be nice if you were only in the... Read More
Mutual funds by definition are a mixed bag of stocks,... Read More
Success in small cap & micro cap stock trading like... Read More
I was devastated!I just couldn't believe it. I was 10... Read More
Stocks breakout from properly formed bases everyday but many investors... Read More
Spread trading is a technique that can be used to... Read More
The Macedonian Stock Exchange (MSE) is not operating successfully. True,... Read More
You probably know the story of Sherlock Holmes and the... Read More
We all know the expression, "My country, right or wrong",... Read More
Ever turn down a street, get half way and suddenly... Read More
I go to the Money Show every year to visit... Read More
When we go to the circus we see a trapeze... Read More
Right now there doesn't seem to be any "gold fever".... Read More
Last time we looked at the real performance of the... Read More
When the stock market is going up and all your... Read More
Stocks & Mutual Fund |