The "Buy and Hold" investor's nightmare.

The trials and tribulations of "Buy and Hold" investors.

Being a Buy and Hold investor is like being in a nightmare where you find yourself the main character of the Greek “Myth of Sisyphus.”

In this myth, Sisyphus is condemned by the god Zeus to an eternity of futile and hopeless labor. He must roll a heavy stone to the top of a mountain. But then the stone rolls all of the way back down to the bottom … and Sisyphus must push the stone each time back to the top again.

A sentence of “futile and hopeless labor” is similar to the situation that Buy and Hold investors have faced during many periods of stock market history. Since Bull Markets are inevitably followed by Bear Markets, the investor’s hard-won gains from the Bull Market evaporate as market prices fall during the Bear Market.

• The result: Very little or no net gain after many years of diligent investing.

That’s not to say the stock market hasn’t gone up over time. It certainly has … in fact, at an average growth rate of 7% annually. You might say: What’s the matter with 7%? The problem is that 7% is a very long term average that emerges over very long periods of market history. In the meantime, there are lots of Bear Markets.

In order to have a statistically high probability that you can achieve an average growth rate that high, you should expect a wait of as long as 20 to 40 years!

Figure I

Looking at the past 200 year historical record, the best time to invest is when stock valuations (price/earnings multiples) are at low levels. The record shows that typical 20-year average returns were much higher after periods of low valuation than after periods of high valuation.

• Right now, we have been in a period of record high stock valuations. As a result, the first two decades of this century will likely see lower average returns.

Looking forward from where we stand today, the average investor can expect a pattern of more frequent and punishing Bear Market periods in between the Bull Markets. As a result, the general direction of stock market prices might be “sideways”, marked by ups and downs that generate no net gain.

• But it is also quite possible that the market will have a net downward direction during this first decade as the market works off the punch-drunk high valuations of the 1990’s and “reverts to an average historical multiple.”

The alternatives to "Buy and Hold".

We aren’t in the 1990’s Bull Market anymore. You will need a more sophisticated investment strategy to be successful in the years ahead ... one that can make money in spite of the inevitable bear markets.

You could hire an investment advisor who is a very good stock picker. The main challenge will be to successfully pick stocks during Bear Markets that continue to perform well. That is a huge challenge and good stock pickers are very hard to find.

You could structure your portfolio with a “fixed” asset allocation technique. This would reduce your stock market holdings for a substitute of mostly bonds and cash. This approach will reduce the potential degree of loss during Bear Markets, but will give you a blended return over time that is closer to what bonds earn. However, depending upon how much of your portfolio is invested in stocks, you could go for many years with very little or no net gain.

The better alternative: long term market timing.

The better alternative is to use a good, long-term market timing technique. Because of advancements in computerized analysis of the markets, there are more and more market timing systems becoming available that can get the job done. The basic challenge is simply to capture the long-term bullish up-trends which can persist for more than a year, even in the middle of a longer-term Bear Market cycle. Then, the market timing technique must be able to recognize the onset of a Bear Market and signal you to get out of the market. (See a chart of our market timing system's "buy" and "sell" signals.)

Using market timing, you can invest in any decent mutual fund or index fund during the Bull Markets, and then move your portfolio into bonds, cash or CDs during Bear Markets. When you follow this approach, your portfolio will grow significantly during the Bull Markets and then level off and grow slowly during the Bear Markets.

• The critical point: When the next Bull Market begins, your portfolio will be much larger than if you had been a Buy and Hold Investor; and, you will earn gains during the next Bull Market cycle starting from a much larger base of investments.

You will be “building profits on top of profits” without suffering significant losses in between. The compounding effect of this will magnify the eventual size of your portfolio more and more as the years go by.

The best alternative: “Dynamic” asset allocation.

We take long term market timing one step further and build it into a disciplined asset allocation process that dynamically follows changing market conditions in multiple asset classes (including U.S. stocks) and various individual market sectors.

Our Model Portfolios adjust their allocations, and move in and out of different investments, to catch the Bull Market phases of the strongest performing asset classes and sectors. This advanced money management technique works to maximize portfolio returns during all periods … Bull and Bear … while also avoiding Bear Market losses.

• Even though the underlying technology is sophisticated, our investment newsletters make it extremely easy to follow by presenting the information in the simple form of a Model Portfolio.

If you are a long term investor with ambitious financial objectives, but a limited appetite for risk, then you need advanced, easy-to-use technology like this …