Buy and Hold
In the last 14 years buy and hold investors have weathered 2 of the worst bear markets in a generation. First, the dot.com bust in 2000 resulted in a drop of over 50% in the S&P 500, and most recently the financial crisis of 2008 left the S&P 500 down 65% from it’s peak (many mutual funds in most 401k participants plans were down closer to 70%!). With the market testing new highs once again, many might think a service such as ours is unnecessary. That couldn’t be farther from the truth! In a bull market, almost everyone makes money. What separates professional traders and investors from the average investor is when a bear market begins. Professionals take profits and raise up cash for the lower prices soon to come. Average investors hold on all the way down, until they can no longer take anymore losses, and sell…Right when the professionals step in and begin buying heavily.
401ktactical.com uses a proprietary technical indicator that we have spent the last 16 years developing and improving. The indicator gives signals for when to be in the market, and when to be out of the market and in the safety of cash/money markets. The indicator detects the flow of money into and out of the stock market. The indicator is designed to detect the movements and positioning of the most informed investors. Since the indicator follows these money flows, it does not predict the market. The main goal of tactical investing is preservation of capital. Our first focus is always, managing risk. Especially in retirement accounts, huge losses are completely unacceptable. Everything we do is geared towards preventing a 2008-like market crash from wiping out someone’s retirement savings. Here’s the Portfolio Equity report for our indicator investing in the S&P 400 midcap market index. It trades as you would in a retirement account, long only, and when it exits the market it goes into a cash account.
Via computerized backtesting of our system, an initial $10,000 would have grown to over $80,000 from 1996-2013 tactically investing in the S&P 400 Midcap market index alone! Also, look at the relatively small drawdowns during the bear markets from 2000-2003 and 2007-2009. In case you are worried about transaction costs, our system traded only 46 times in 18 years–an average of only 3 times a year! Again, this strategy was discovered in 2011, the results shown are from a computerized backtest of the strategy. This strategy has been “live” since 2011 in our own personal accounts. As with all strategy development, we are constantly striving to improve, to minimize risk and maximize return. For this reason, as our strategy evolves and improves we will update the performance reports here and on their respective pages.
Performance by Month and Year
Tactical trading is not market timing. Tactical traders do not pick market tops or bottoms. We manage risk by buying as soon as possible after an uptrend begins, and sell as soon as possible at the beginning of a downtrend. Our goal is to capture the majority of the move both up and down. We recommend using major market index ETF’s that track indices such as the S&P 500 (via “SPY”), the mid-cap S&P 400 (via “MDY”), and small-cap Russell 2000 (via “IWM”).
Tactical trading can be accomplished in a subscriber’s 401k plan by looking through your list of investment choices and finding the funds you have available that invest in the major market indexes. Almost all plans are going to have a fund that invests in the S&P 500–this is going to serve as the backbone of your investment plan. Another advantage of index funds is that they tend to have far lower fees than your other investment choices. Next look for funds that mention “mid-cap index” or “small-cap index”. These funds will round-out your tactical investment strategy.
First let’s look at a recent example, the S&P 500 from spring of 2000 to the spring of 2013, 12 years of virtually no growth, in fact 2 devastating bear markets cut the S&P 500 in half both times.
This 13-year period of market activity consisted of sideways action with very little gain. At the end of 13 years the market had gone virtually nowhere. An investor during that time would have had little more than they started with. Back then, the majority of American workers had their retirements covered by pensions from their employers–not anymore. American companies and corporations have shifted the burden of your retirement from them to you.
Now, let’s look at the type of performance an investor might have achieved if they had invested tactically. (This is a backtested simulation of the trading strategy that we presently use for our subscribers, they are not actual trading results.) Subscribers are invested in the market in their appropriate asset allocations during green periods, and in the safety of the money market account in their 401k’s during the red.
A Buy and Hold investor from the peak in 2000 until the middle of 2012 would have had a net gain of 0%–12 long years of virtually no return. Our trading model almost doubled in the same time frame.
A Strategy for 401k Participants
401k investors are often very limited by their investment choices. Often there are only about 10-30 funds to invest in. That’s ok, as almost all 401k’s will have the 3 index funds that we use to implement our strategy, the S&P 500, the S&P 400, and the Russell 2000.
To implement our strategy in your own investing, follow the trading signals as we give them. Our signals use weekly market data and signals are generated after market close on Friday. Investors can use our signals to place trades over the weekend in their own 401k’s to be executed at the close of the market the next business day.
Often, retirement plans strongly discourage any trading and place limits on the number of trades you may conduct. You will need to find out how many trades you may conduct per year. Our strategy usually makes about 3-5 trades per year.
The indicator is designed to be in the market in good times, and to be out of the market after it begins to drop (but before it drops too much). The indicator does not predict the future, and therefore cannot discern in the beginning between a minor correction and a bear market. Many of the trades that we conduct may not “feel right” to you. That is ok, to make money in the market, one must buy on bad news, and begin selling on good news. You must be able to buy when everyone else is panicking, and sell when everyone is talking about their stocks. This is a fundamental difference between tactically investing, and a “buy and hold” investor.
If you have any questions, comments, or concerns please email email@example.com.
401ktactical.com is a division of MCR Capital Management, an independent Registered Investment Advisor in St. Louis, Missouri. As time permits, some of my research is published on various market websites such as Seeking Alpha.