Buy-and-hold. Buy-and-hold. If you had a dollar for every time heard that phrase, you probably wouldn’t even need to trade. The importance of buying and holding stocks for the long-term is one of the first trading strategies I learned. You probably did too. “Everybody knows that stocks only go up over the long run,” right? That may be true over very long periods of time, but it’s also true that in the long run, we are also going to be dead… Seriously, though, we don't always want to wait ten years or more to make a profit? We may be okay with tying up some portion of our portfolio for long periods of time, but other money we might want working for us today.
The stock market has risen since its inception, but it has hardly been steady upward progress. Indeed, decades have gone by with very little upward progress. Take a look at the chart below showing the S&P from 1900 to 2015. You can see where the market trends higher, is followed by a declining or choppy period, and then grows again.
The chart above shows over a century of stock market data. Yet, investors don’t invest for centuries. Instead, we tend to invest for decades. It might not surprise you then to learn that how well you can expect to do over the next decade as a buy-and-hold investor depends a lot on your starting point. If you are investing late in a cycle, then sub-par returns should be expected.
Looking at the graph above, there are several periods where the market made very little progress for a decade, or even longer. These secular bear markets come with regularity and are likely to continue.
So does buy-and-hold work? Yes. If you happen to begin near the start of a growth period. But what if your age and the timing of the next bull market don’t perfectly align? That is where the Wanderer Pretirement Trading System can be helpful.
Let’s take a closer look at the last secular bear market to see how stocks tend to behave when they aren’t in a period of steady growth.
The chart above shows the complete secular bear market that took place from 1965 to 1980. Notice that just because the Dow Jones Industrial Average was roughly at the same price in 1980 as it was 15 years earlier, it hardly got there in a straight line. The fifteen-year choppy period may not have been profitable for a buy-and-hold investor that started in 1965, but an active trader had plenty of volatility in which to profit from.
Here at Wanderer, we can’t afford to tie up all of our money and wait for 15 years to make a profit on our investments. We allocate a good chunk of our portfolio trading the shorter-term market swings like those shown above. To do that, we have come to rely heavily on our Wanderer Financial Pretirement Trading System to signal the beginning of a large move. So how does it work? Let’s take a look at the COVID collapse that took place in March. Did our trading system do its job? It did. In fact, the sell signal came less than 2% off the market’s highs, saving us a huge amount of both money and stress in the ensuing weeks.
Is the signal always perfect? Of course not, nothing is. We don’t trade every single signal. Sometimes they fire when the market is clearly still trending the other way, and we can ignore those. Other times they might flip in the course of a couple of days, ending with either a small win or a small loss. But it’s in times like the COVID selloff where it pays for itself. Saving yourself a 35% drop so you can jump back in once the dust settles will do wonders for your account returns for years to come. It will also do wonders for your mental well-being. Bear markets are incredibly stressful times. Being out of the way of them clears your head, and leaves you wide open to the possibilities they create.
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