3 Ways To Avoid Going Off A Stock Market Cliff With The Buy-And-Hold Herd

[BTravlin]

Seems as if someone believes buy and hold doesn't work in today's investing environment.

3 Ways To Avoid Going Off A Stock Market Cliff With The Buy-And-Hold Herd

"But what if an investor were a model of self-discipline? My own research confirms that investors who followed Bogle’s advice to the letter would perform spectacularly during periods of low volatility like we witnessed in the 1980s and 1990s. But you may be surprised by what else I learned: The pattern breaks down as volatility picks up — as it has in recent years.

I ran some numbers myself back in 2011 and reran them recently. I compared the performance since 1979 of a buy-and-hold Bogle adherent to that of an investor who sold off Vanguard’s 500 index fund during significant market corrections, then bought the fund back once the stock market regained momentum. I found that the latter investor — the one who probably slept better at night during the big stock market corrections — garnered higher returns than the investor who stuck with Bogle’s strategy. Mr. Sleepwell’s portfolio did lag a bit during the great bull market of 1982 through 1999, but it more than made up the lost ground in the volatile markets that followed."

[Major Tom]

Quote:

Originally Posted by BTravlin I found that the latter investor — the one who probably slept better at night during the big stock market corrections — garnered higher returns than the investor who stuck with Bogle’s strategy.

I can envisage a scenario in which the latter investor loses sleep, wondering whether he sold at the right time, and whether he'll pick a good time at which to buy back in.

[eta2020]

Article:
"Few people have the discipline to execute a true buy-and-hold strategy. They get too excited and buy into late-stage bull markets and get frightened when the market falls, bailing out at what ends up to be the near bottom of a bear market."

The herd is very small

[M Paquette]

Heh, heh. My favorite handwave here:

Quote:

3 Ways To Avoid Going Off A Stock Market Cliff With The Buy-And-Hold Herd "... But you may be surprised by what else I learned: The pattern breaks down as volatility picks up — as it has in recent years."

So, we simply switch to 200 day moving average market timing when volatility is about to increase, and move back to buy-and-hold when volatility is about to decrease. And he's backtested this against a whole bull market and the following secular bear market. Data mining much?

Or, we could look at his Method 2, pretty exotic stuff:

Quote:

Here’s how to set it up. Determine a target allocation between stocks and bonds. Most experts recommend a 50-50 or 75-25 split, depending on your own risk profile (50-50 for more risk-averse investors, 75-25 for less). Once you’ve decided on a proper split, allocate your portfolio according to those values. Now, every year, you assess the relative size of each of your allocation baskets. If stocks have been on a tear, you may start the year with a 50 % stock allocation, but end it with 60 % in equities. At this time, you take profits on part of your stock portfolio and plow those profits into the bond market so that your actual allocation again meets your target allocation of 50-50 stocks-bonds.

Wow. I'm sure glad we've got a real gooroo to tell us about this exciting new strategy.


Method 3 sounds like megafun. Options hedging strategies and using a S&P500 Short ETF. What could possibly go wrong? (Hint: Kids, the short ETFs are designed to reflect short position behavior over a short period of time as reflected in the depths of the prospectus. Holding for longer periods will have expenses dominating the fund behavior. I know folks who have held a 3X short ETF for a year, wondering why it wasn't showing the gains they expected. )



Buy-n-hold with exotic, gooroo approved Method 2, please.

[utrecht]

Something to think about. The SP500 is already back above its 200 day MA though so since he only looks at the moving avg at the end of the month, as of now there would be no shift away from stocks. This makes you wonder how much randomness plays a part. The SP500 was more than 2% below its moving avg on Oct 15-16. If that had happened to be Oct 31, he would have his clients money out of the market and into money market funds. Because it fell on different dates of the month, hes doesnt make any changes. So he could be 100% invested or 100% not invested all based on the randomness of a calendar.

[haha]

Quote:

Originally Posted by M Paquette Heh, heh. My favorite handwave here: So, we simply switch to 200 day moving average market timing when volatility is about to increase, and move back to buy-and-hold when volatility is about to decrease. And he's backtested this against a whole bull market and the following secular bear market. Data mining much?

One needs a very broad definition of data mining to include his method #one. He started in 1979, a year that the world's greatest bull market in terms of overall $ gains began.

He compares strategy #1 to buy and hold in 3 sub-periods, and the entire 1979 to 2013 test.

Baby Boomer 401 k bull, from his start in 1979 until it's end in 1999, and then the choppier markets since then. He also compares the total result, from 1979 to the present. The passive portfolio is what we are all familiar with as a pure equity portfolio, the active portfolio was run mechanically according to the MA rule he mentioned. It is assumed that in a tax deferred account there is no meaningful drag either from taxes, or expenses which I at least believe is reasonable in the US anyway. Each portfolio begins with $25k in a 1979.

The active portfolio is behind at the 1999 waypoint, $467k to $329k.

But in 2013, when the trial is wound up, the MA (active) portfolio has $1.2 million and the passive stock portfolio has $770k. Not bad for the passive, but not as good as the active which also was exposed to less market risk during the whole test.

So, my take home would be that for a tax deferred acct or Roth acct, unless the investor expects unending "once is a lifetime 4 sigma" huge bull markets, the active moving average approach dominates.

Ha

[eta2020]

Quote:

Originally Posted by haha But in 2013, when the trial is wound up, the MA (active) portfolio has $1.2 million and the passive stock portfolio has $770k. Ha

Look at a graphs. It is very interesting that ENTIRE difference (in return of 34 years) is produced in years 2008-2009 when passive had massive losses and active actually made some money.

I suppose in a secular bear market his approach will do well while in a secular bull market it will do poorly......

[haha]

Quote:

Originally Posted by eta2020 Look at a graphs. It is very interesting that ENTIRE difference (in return of 34 years) is produced in years 2008-2009 when passive had massive losses and active actually made some money.

Unfortunately, this is not true. I have not the motivation to take us through this step by step, but if you are so motivated, check it yourself. Once I realize that I am dealing with a quasi religious belief, I am done debating. Anyway, board rules forbid religious debate.

Ha

[eta2020]

Well in bull market 1980-2000 he underperforms. 2 cyclical bear markets within 10 year secular bear market of 2000-2010 he outperforms. I am not arguing with you just pointing it out from his graph.

I think anybody could step back, look at past 34 years and manufacture approach will beat S&P 500. But real mutual fund managers who have to do it without hindsight 20/20 have actually difficulty doing it.

[haha]

Quote:

Originally Posted by eta2020 Well in bull market 1980-2000 he underperforms. 2 cyclical bear markets within 10 year secular bear market of 2000-2010 he outperforms. I am not arguing with you just pointing it out from his graph. I think anybody could step back, look at past 34 years and manufacture approach will beat S&P 500. But real mutual fund managers who have to do it without hindsight 20/20 have actually difficulty doing it.

True, and he might have tested and retested to find his 2% filter. One could try to go out of sample and test other US periods, and other markets. It must be admitted that this is not a multi-filter approach which is often a giveaway for data mining.

I am not motivated, since I already market time right up to where I am not sure that I want to take the direct and indirect tax hits. I could in my relatively small IRA, and this might be better than what I do, which is to use most of that capacity for fixed income. Among dirty market timers, I am surely one of the dirtiest.

Ha

[clifp]

Quote:

Originally Posted by haha I am not motivated, since I already market time right up to where I am not sure that I want to take the direct and indirect tax hits. I could in my relatively small IRA, and this might be better than what I do, which is to use most of that capacity for fixed income. Among dirty market timers, I am surely one of the dirtiest. Ha

A Ha (ha) you finally admit what I long suspected, you are a dirty old man.

[HFWR]

Quote:

Originally Posted by clifp A Ha (ha) you finally admit what I long suspected, you are a dirty old man.

An admirable quality...

[walkinwood]

I wonder if the results would be different in a draw down phase.

In any case, the tax implications would keep me away.

[Kaufmanrider]

I'd be interested in seeing his chart with the 1% annual fee and commissions.

I ran numbers back to 1979 for a buy and hold, $25,000 initial, through 2013 on an excel spreadsheet I use and obtained from the Bogleheads Wiki website. Maybe my sheet is wrong as my numbers don't match his. His active comes out with 1.2 million ending (11.7% annual return), I assume he excludes his fees as he make a comment even with fees his active strategy beats a buy and hold strategy.

100% VTSMX (Total Stock Market) CAGR 11.8%, ending balance $1,255,558. Equal to his results, not counting his fees.

100% VFINX (SP500 he uses) CAGR 11.73%, ending balance $1,212,212. (far more than the 750K he came up with and equal to what his portfolio had not counting his fees?).

The next two are for us how don't like all the risk.

60% Total Market, 40% Total Bond, CAGR 10.58%, ending balance
$843,465.

50% VFINX, 50% Total Bond, CAGR 10.11%, ending balance $728,394.

Quote:

Originally Posted by BTravlin Seems as if someone believes buy and hold doesn't work in today's investing environment. 3 Ways To Avoid Going Off A Stock Market Cliff With The Buy-And-Hold Herd "But what if an investor were a model of self-discipline? My own research confirms that investors who followed Bogle’s advice to the letter would perform spectacularly during periods of low volatility like we witnessed in the 1980s and 1990s. But you may be surprised by what else I learned: The pattern breaks down as volatility picks up — as it has in recent years. I ran some numbers myself back in 2011 and reran them recently. I compared the performance since 1979 of a buy-and-hold Bogle adherent to that of an investor who sold off Vanguard’s 500 index fund during significant market corrections, then bought the fund back once the stock market regained momentum. I found that the latter investor — the one who probably slept better at night during the big stock market corrections — garnered higher returns than the investor who stuck with Bogle’s strategy. Mr. Sleepwell’s portfolio did lag a bit during the great bull market of 1982 through 1999, but it more than made up the lost ground in the volatile markets that followed."

[robertf57]

Have we learned nothing from Long-Term Capital Management's (and other quant funds) demise??!!? These were brilliant Noble Prize wining people. If you think you can successfully time the market and make net profits over a buy and hold approach reliably and repeatedly, then I want you to pick up some lottery tickets for me.

And looking at how a strategy might have performed using past data is hogwash. The only important data is prospective. I can pick a set of criteria that will be successful from any set of data you give me.

[papadad111]

Ha ha. I always thought I was good at timing the market. For years I could get in and out and beat the market on paper.

But alas... Every April I re-learned the damn tax impact to my account always killed me gains ...

thus now have been passive investing in all but a very tiny portion of portfolio now for years. Bogle was correct ...

These studies are a joke - failing to include tax impacts and fees /commissions on total returns make them pretty much useless comparisons to passive investing.

[ripper1]

Quote:

Originally Posted by eta2020 Article: "Few people have the discipline to execute a true buy-and-hold strategy. They get too excited and buy into late-stage bull markets and get frightened when the market falls, bailing out at what ends up to be the near bottom of a bear market." The herd is very small

Amen brother!