When I was growing up, I heard many a person and investor say that buy and hold will always win. Prior to year 2000, you could take any five year period between 1930 to 2000 and always prove that it was better to buy and hold than to move money around or sell and take a profit then reinvest it later when market conditions were better. Hell I watched a bunch of those years myself when I started contributing to my retirement account in the years that ran from 1986 to 2000.
Look at the chart above which runs from 12/31/1985 through 1/1/2000 and you will see that the old school thinking worked for this period of time. 592% gain on the S&P 500 over 14 years. So your wondering, “what’s the problem?” It does look easy, doesn't it? So by this point in your investing game you have become relaxed and use to the fact that when things get bad, it only a temporary blip and it will recover. So what I need to show you next is what happen the next 12 years.
Now look at that closely, now look back up at the first chart. Do you see it???? If you did the buy and hold thing over the last 12 years, you lost money. What changed in the markets? In my opinion what has changed is that we now live in a world market. Add on the fact the the Internet has made news and information available in an instant and you have the current stat of the markets. This of course is the simple version because there are many different factors but by in large this is and was the major change.
So what you need to do as investor/manager of your retirement account is learn now, while you have small money to make important decisions about your money that others are to scared to do as their account grows. It needs to be fairly simple and not time consuming. Also, no special software should be required. Everything that I’m about to show you, you can do once or twice a week using the internet. Look at your charts on Friday and make your decision so Monday if you need to move money, move it. How hard is that? Don’t over think it. Don’t add news! All you have to do is watch price, moving averages and not worry about entering at the bottom or exiting at the top. Get the meat out of the middle and avoid the large losses.
One more thing I want you to understand before we move on so you will understand why to avoid major losses. Let’s say you have $1000 invested. You loose 50% which is a $500 loss. That of course leaves you $500. So if the next year the markets go up 50%, do you makeup the $500 loss? No, not even close. 50% of $500 is $250 and that only gives you a balance of $750. You would need the markets to double or go up 100% and that rarely if ever happens. I personally have never seen it. Ok now let’s show you some stuff.
Let’s take the last four years that President Bush was in office, 2005 thru 2008. We are going to use just a weekly chart and on that chart we are going to use the 10 and 30 week moving average. Every time they cross we are going to make a move. When the 10 crosses the 30 going up, we get in and visa versa we exit. Yes there will be pictures. For the sake of argument, we are keeping our investment vehicles simple but the most aggressive. We are going to start off with the C-fund, S-fund, L-2040 and the G-fund for safety. You have to remember that the L-funds only began their existence in August 1, 2005. When we get a sell signal we will also bail to the G-fund for safety, even though we all know the F-fund or Bonds is an option. I want to make this as simple as possible and then you can grow with the ideas later down the road.
First, in order to break a bad habit or learn a good habit, we need to see what was done in the past. We need to learn from mistakes and whatever we did right. So here we go. Above is a chart of the S&P 500 and we are going to buy and hold and see where we land at the end of the road. Because the L-2040 did not exist until 8/1/2005, the first 8 months of the year we are going to invest in in the C and S funds and split it equally between the two. Lastly in order to make an impression on you, let us pretend that your 20 years deep in your career and have about $500,000 in your account. Remember, you have to be able to make a decision based on price, not news on the TV or what your guru friend is telling you. You need to do this.
Begin date 12/31/2004
C-Fund – price per share is $12.91 and you just put 50% here or $250,000
S-Fund – price per share is $14.73 and you just put 50% here or $250,000
The L funds open for business on August 1, 2005 so we transfer our monies to the aggressive and safer L2040.
Exit 7/29/2005
C-fund - 13.28 - 2.87% - $7175
S-fund - 15.88 - 7.81% - $19,525 = $ = $526,700
Entry L2040
8/1/2005 - 14.03
End of 4 years
L2040 - 12.4894 - (10.98%) = ($57831) = $468,869
Well, well, that pretty much sucks doesn’t it? You just lost $31,131 of your original $500K plus the $26,700 you earned with the C an S, because of one bad year. 2008 was a devastating year and one that should have been avoided. This was the year that I started to do something about it and it was a big hello moment. Old School and just letting it run was not the answer. Now before we go on and on about the learning curve, let’s look at what would have happened if we had a system.
Above is a weekly chart that I customized using the software that comes with my brokerage account. You do not need it because you can do this at Yahoo Finance, Google finance, FreeStockcharts, and or Stockcharts. My software just allows me to draw lines and write on it amongst other things, but you do not need that unless your writing a blog or teaching to others. The keys to the chart above is to make sure that your looking at a Weekly chart. Then we select two moving averages with the options that are available on just about every webpage. Select 1 moving that is set to 10 and make sure the it is moving average Exponential. Select a 2nd moving average Exponential and set to 30. The colors should be set different but make sure you know which is 10 and which is 30. When the moving averages, also known as ma’s are rising the 10 should be on top of the 30 and we are invested. When the 10 crosses the 30 going down or falling and it crosses the 30, we exit the L-2040 and enter the G-fund. We stay out until the 10 crosses back above the 30 and starts to rise and then we exit the G-fund and enter the L-2040. Simple!! Who needs the news.
Now let’s play out the moves that we see on the chart above and see where we end up. One note, we did not exit the C an S just to get into the L2040. We waited until the market told us to bailout and then we entered the L-2040
Begin date 12/31/2004
C-Fund – price per share is $12.91 and you just put 50% here or $250,000
S-Fund – price per share is $14.73 and you just put 50% here or $250,000
12/31/2004
C-fund - 12.91 (50%)
S-fund - 14.73 (50%)
Exit - 7/5/2006
C-fund - 13.93 - 7.9% - $19,750
S-fund - 17.13 - 16.29% - $40725 = $60475 = $560475
Entry 7/5/2006
G-fund (100%) - 11.44
G fund - 11.50 - .5% - $2802 = $563,277
Entry - 8/15/2006
L-2040 - 15.41
Exit 1/2/08
L-2040 - 18.07 - 17.26% - $97221 = $660498
Entry 1/2/08
G-fund - 12.28
End of 4 years 12/31/2008
G-fund - 12.7406 - 3.75% - $24768 = $685266
So let’s review this. If we went old school and just threw our money at our TSP account and did what we are told as kids, teens, and adults, we end up with $468,869. With just a little work once a week for about 15 or 20 minutes, we end up with $685266. Hmm, so who reading this would throw away $216,397 dollars because they do not want to take the time to learn how to manage their money? If you still believe for a moment that you can’t do this, then you deserve what you get.
If I had some old fart telling me this in 1986, I know some old fart today that would have been long since retired. Ok, besides all of this, let’s consider one more thing that you haven’t even processed yet. What’s going to happen when you retire? Are you going to able to make a decision about your monies or are you going to be paralyzed?
Now do yourself a favor, stop asking and listening to others and teach yourself. That includes me! Knowledge is power. You might want to also bookmark that Click for a chart also. That will update with current data and it also shows you that you do not need special software to do this. Everything you need to make a decision is online and for free.
Thanks for the info Mark!!
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