At the gym we often hear, “There’s no gain without pain.” Those words can also be used to relate to the stock market. Over the past 30 years we drank the Kool-Aid flavor of “buy and hold”. Since 2000 that might have felt like “hold and hope”. But since hope is not a strategy, let me suggest that you take the time to see what you can learn. Things may change. Take four minutes to look here http://bit.ly/The-8080-Rule
Some firms talk a good game about active management, but keep the evidence to themselves as they call it “proprietary”. What you see here for example, are the results of an actual money manager’s work from 2007 to July of this year. Within four days of Bill Gross making history by leaving PIMCO I was at the company’s world headquarters speaking before about 100 of my peers. It is my assertion that we the professionals do not generally do a good job of demonstrating to our clients about how they might have kept their assets intact when markets turn ugly. We need to show you what we have learned. Unless we haven’t learned anything. The goal of this manager is to buy and sell in an attempt to participate in 80% of up-markets and avoid 80% of down-markets. This is an excellent graphic illustration of how one firm actively manages money. These are actual trades of between 20% to 100% of the total money managed, they are not hypotheticals. There is no promise that the companies that do this work can guarantee the future success of their ability to detect upward or downward trending markets. While I am sure you remember the downward volatility of 2008, you are not likely to recall what you were doing on June 12, 2008. This company’s indicators and their emotionless models told them it was time to become defensive. The red arrows indicate sales from corporate bonds to cash and the green arrows demonstrate where moves from cash back into bonds were made. Think in terms of red means risk off, out of the market, and green means risk on, back into the positions. On December 26, 2008 the firm’s model saw opportunity and began to go back into the market. Let’s look at what this difference can mean to your money.
The moral of the story here is to set up strategies in advance that might help you limit your losses by reducing downside participation. We know in sports a good offense is the result of a good defense. It makes just as much sense to keep your losses reduces so that investors don’t have to hope or swing for the fences just to get back to even. Another way to look at it is to set the goal and look for the evidence where losses can be reduced to -20% as that means it is necessary to see a gain of 25% to get back to your original value. If investors are complacent and allow their losses to be -60%, for example, it requires a gain of 120%. I don’t like those odds. This is especially true when taking income from portfolios that are necessary to maintain lifestyles. If you are looking at the markets today the Sage of Omaha, Warren Buffett , said it best, “The market will do whatever it has to in order to prove the maximum number of people wrong.”