The Buy and Hold Investors' Nightmare

Being a Buy and Hold investor is like living throughand bank accounts. But how is a growth-oriented
a nightmare where you find yourself the maininvestor to know when it is safe to get back into
character of the Greek "Myth of Sisyphus."the market ... when to take advantage of the
Futile and Hopeless Labor: In this myth, Sisyphus isdrop in stock prices?o Now there is an effective
condemned by the god Zeus to an eternity ofway to make the market's up and down cycles
futile and hopeless labor. He must roll a heavyyour friend, how to know when it is safe to get
stone to the top of a mountain. But then theback in to the market as well as when you should
stone rolls all the way back down ... and Sisyphusget out.
has to push the stone back up again to the top.Market Timing to the Rescue
A sentence of "futile and hopeless labor" is similarMarket timing has historically been a rather
to the situation that Buy and Hold investors havedubious art, particularly as practiced by a colorful
faced during many periods of stock marketvariety of "market gurus" who tried to build
history. Since "Bull" Markets are inevitably followedreputations by picking market tops and bottoms.o
by "Bear" Markets, the investor's hard-won gainsBut computers and quantitative modeling
from the Bull Market up-cycle evaporate astechniques are changing the reputation of market
market prices fall during the Bear Markettiming. Today, increasing numbers of sophisticated
down-cycle.investors are coming to appreciate the potential
That's not to say the stock market hasn't goneeffectiveness and power of disciplined market
up over time. Looked at over hundreds of years,timing techniques.
the market has grown at a 7% average growthThe primary benefit of a longer-term market
rate. You might say: What's the matter with 7%?timing model is to capture the big market trends ...
The problem is that in order to have a statisticallyup and down. If you can effectively capture the
high probability of achieving an average growthup cycles and avoid the down cycles, your
rate that high, you should expect a potential waitportfolio will be miles ahead of the Buy and Hold
of as long as 20 to 40 years!investor.
Bear Markets Appear at Regular Intervals: LookingBut You Have Heard that Market Timing Doesn't
at the past 200 year historical record as authorWork: Yes, that is what you've heard from the
John Mauldin does in his book Bull's Eye Investing,entrenched interests within the financial business ...
there have been 7 "secular" bull market cyclesthey can make more money off you as a Buy
and 7 secular bear cycles ... the bulls averaging 14and Hold investor. But there are a growing
years in length and the bears 15 years. The wordnumber of financial advisors, investment
secular means "era" as in a long time.newsletters and portfolio managers that are
Bull and bear cycles are long enough to consumeembracing the new technology simply because it
a major portion of your earning years. Look atworks.o And now there are several mutual fund
the cycles of the past century: Thefamilies that cater to market timers. The two
Depression-era bear market cycle lasted frombiggest are Rydex Investments and ProFunds,
1929 to 1945. Then the bull cycle after WorldInc.
War II lasted from 1946 to 1964. After that, aOne alternative to market timing is to hire an
new bear market cycle lasted from 1965 untilinvestment advisor who is a very good stock
1981. The most recent bull cycle lasted from 1982picker. The challenge will be to successfully pick
to 2000.o 15 to 20 years is a long time to waitstocks that continue to perform well during bear
for nothing better than a zero or negative return.markets when an extremely high percentage of
We are Now in a Secular Bear Market Cycle: Bullall stocks go down. That is a huge challenge and
market cycles are preceded by very low stockgood stock pickers are very hard to find.
market valuations (low P/E ratios); and bearAnother alternative is to structure your portfolio
cycles begin after periods of very high valuation.owith a high percentage of bonds and cash, using a
The "bubble" peak year of 2000 saw record-hightraditional asset allocation approach. This method
P/E ratios reflecting manic levels of bullish hysteriawill reduce the potential degree of loss during Bear
at the end of an 18-year secular bull cycle.Markets, but whatever portion you allocate to
It is quite reasonable to view the 3-year bearstocks could still lose 40% or more and may take
market that began in 2000 as just the openingyou many years of patience just to reach
act in a new secular bear cycle that could easilybreakeven.
last until about 2015 if you assume an historicalThe Best Alternative: Tactical Asset Allocation
average.o But secular bear cycles will include bullishYou can take long term market timing one step
interludes ... just as bullish eras have includedfurther and build it into a disciplined asset allocation
regular bearish phases.process that dynamically follows changing market
Secular Bear Cycles have Plenty of Ups andtrends in multiple asset classes (such as bonds,
Downs: In fact, during the average bear marketstocks and real estate).
cycle, roughly 42% of the years have been upThe point is to use timing techniques for each
years according to John Mauldin in Bull's Eyeasset class to capture the up-cycles and avoid
Investing. The intermediate up-cycles last about 2most of the periods of under-performance and
years on average. On the flip side, secular bulllosses.o This is the most efficient approach to
cycles show a similar but opposite tendency. Sinceasset allocation ... because it mostly eliminates the
1900, about 17% of the years during secular bullslong periods of under-performance that would be
have been down years.inevitable using a traditional asset allocation of
The current bullish phase in the stock market isfixed investments.
most likely just one of those bullish intermediateThe average investor can now more easily
up-cycles that usually appear in the middle ofaccess this sophisticated approach through multiple
secular bear cycles where the predominant, longavenues ... individual investment advisors that use
term trend is down. So the current bull marketthe approach and investment newsletters that
period is likely to roll over into a continuation ofoffer model portfolios based upon market timing
the secular bear down-cycle that began in 2000.techniques. In addition, several mutual fund
A Nightmare for Buy and Hold Investors: So far incompanies, including Rydex Investments and the
this decade, Buy and Hold investors have probablyHussman Funds, have introduced mutual funds
felt like the mythical Sisyphus. After makingbased upon market timing technology.
fantastic gains during the Roaring 90's, manyAnd there is the "do it yourself" approach. An
investors lost between 30% and 70% on theirincreasing number of trading software packages
stock market portfolios during the bear marketoffer the analytic capabilities for individual
of 2000 to 2003. Then a bullish interlude began ininvestors to experiment with their own
2003. If an investor was fully invested at thequantitative timing techniques. Many day traders
beginning of this phase, they have probablyhave already figured this out.
recouped about 70% of what they had lost.oBut as a long term investor, your objective should
Almost 7 years into the new secular bear marketbe to invest heavily in the market during a period
cycle and the average Buy and Hold investor islike the 1990's and then to be out of the market
still down about 15%, in spite of the recent bullduring a bear market like 2000 to 2003 when a
market interlude.huge destruction in value occurred.o Capture the
The Nightmare has only Just Begun: The currenthuge trends and you will mostly compound profits
bullish interlude is likely running out of steam. Aton top of profits and the power of long term
nearly 4 years in duration, this bull is getting "longcompounding will take over to accelerate the
in the tooth" by historical standards. Lookinggrowth of your portfolio.
forward from where we stand today, theWe aren't in the 1990's Bull Market anymore. You
average investor can expect a pattern of morewill need a more sophisticated investment
frequent and punishing Bear Market periods instrategy to be successful in the years ahead ...
between Bull Market interludes.one that can make money in spite of the
Since the total return on stocks has typically beeninevitable bear markets.
negative or near zero over a complete secularNow you can avoid the nightmare and tragedy of
bear cycle, the Buy and Hold investor ... who hasthe Greek Sisyphus. To stay on top of the
already waited 6+ years ... could easily have tovolatility observed in market cycles Mark
wait another 6 to 7 years and still receive norecommends that you subscribe to a investment
positive net return.newsletter that provides you investing tips and
Most investors' natural reaction would be to fleeadvice about market timing.
the exits and put all their money in bonds, CD's