Tuesday, September 13, 2005

Gotta Know When to Hold Em'


I don't know about the rest of you, but I've always been told in the past that the way to invest in the stock market is to buy a good stock and hold it. Stock brokers in particular will tell you this, and of course they're more than willing to help you execute that strategy.

And indeed, in 1966 the Dow Jones closed just short of 1000, while it now stands at around 10,700, a 10 fold increase. But does tell the whole story of a buy and hold strategy?

Look at this chart (via The Big Picture)


Yep, stock returns have grown dramatically since the early 20th century. However, there are long periods of time where the market is flat, down, and with distinct upswings. Bob Brinker, the financial consultant and radio show host, is a huge advocate of evaluating the market in terms of long cycles and "secular" cycles. Indeed, look at this chart from 1966-1982 (again via The Big Picture), if you had executed a buy and hold strategy, you wouldn't have made much. Yet inflation would have eaten you alive.


It would seem that the better strategy would be to buy in the secular bull (green) markets only, and sell into the secular bear (red) markets.

Duh.

So, how do you time it?

That's a very good question. And if I knew the answer, I wouldn't be writing a blog.

I'm no financial expert by any means. But as a schmo trying to make some money, I recommend finding a financial adviser who does not just advocate the knee jerk "buy and hold" strategy in the stock market. The Angry Bear (mentioned above) has been a good resource for watching the market. Bob Brinker offers a monthly newsletter ($185/yr.) advising on buy/sell strategies and on the use of no/low fee funds for a do-it-yourself approach to investing. I'm sure there are many other resources out there that do the same thing.

Something to consider if you're into investing and want to maximize your returns.

Oh....and consider this when deciding when to get in/out:


If history repeats, next year should be a tough year.

3 Comments:

At 8:36 PM, Anonymous Anonymous said...

"the compelling Real DJIA, 1924-now" at
http://homepage.mac.com/ttsmyf
"the 3 Fed Chair warnings, Real DJIA" at
http://homepage.mac.com/ttsmyf/3warnsRD.html

 
At 12:52 PM, Blogger Karthik Gurusamy said...

I am a bob brinker fan and too believe in this one big secular trend containing multiple cyclical ones.

He says cyclical ones last 1 to 3 years; but when is this bull going to end which started in March 2003? I got out early and waiting to enter again.. I don't really believe bob can continuously time the market correctly (though he did the two great ones -- Jan 2000 and March 2003).

Anyway I am slowly beginning to believe in long term (I mean 10+ years) being in market.. because there seems no sure way of timing this shorter cycles.. but if you stay for 10 to 15 years...it is almost certain you ride a secular bull.

 
At 2:51 PM, Blogger Greyhair said...

Time will tell.

I figure Bob knows a lot more about the market than I. I pay for the newsletter, so I might as well follow the advice. So far...so good.

I think a long term 10+ years will serve you well giving decent returns. That's history anyway. Bob thinks a timing model works better. And I'm just scared enough of the economy and administration policies to be a willing believer.

 

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