The End of Buy and Hold ...
And Hope
Buy and hold investing is a
popular strategy, and the thinking is straightforward: in the long run, the
market will offer returns, in spite of short-term volatility. In theory, this
is a sensible idea. Unfortunately, this approach does not work in today’s
market.
Why not? Of course, the market
is down for this month. But that’s not the reason this is not a buy and hold
environment. It’s not just about the recent correction, or the end of a market
rally. The current trend fits into a much bigger picture… and it’s a picture of
a long-term bear market.
Secular markets are
long-term trends, typically lasting about 18 years. Secular bull markets
generally see stocks return at least 20% for the duration, while secular bear
markets see stocks decline at least 20%. And these secular trends are interspersed
with shorter, cyclical bull and bear markets.
From 1982-2000 we
experienced a secular bull market: in that period, stocks offered a return if
you bought and held for the duration. (Click to enlarge)
S&P 500 from 1982
to 2000: A Secular Bull Market
Source: finance.yahoo.com
But since then? We have
been in what I call a secular bear market. As you can see below, an investor
who bought into an index that tracks the S&P 500 as this trend began in
2000, has experienced a negative return. And based on the typical length of a
secular bear, we could have several more years to go in this trend.
S&P 500 from 2000
to 2010: A Secular Bear Market
Source: finance.yahoo.com
And it’s not just over the
last 30 years that this cycle has occurred. We can look back over the last
century and see a continuum of secular markets, with bear trends starting in
1901, 1929, 1966, and 2000.
Source: Thechartstore.com
Because long-term market
trends are riddled with cyclical bear and bull markets, there are plenty of
opportunities for gains... investors just have to watch for them because they
occur in the short-term. This is why a buy and hold approach doesn’t hold up in
a secular bear market.
So now what? As I said
months ago after this steep market rally, it might be a good idea to lessen
your risk in your retirement portfolio. Wait for the downtrend to reverse and
start back up. When the S&P 500 fell below the 200 day moving average, it
was a signal to raise cash. Historically this has been a good indicator of a
reversal.
Source: finance.yahoo.com
And that sell signal was
reaffirmed by a spike in the Chicago Board Options Exchange Volatility Index
(VIX), also called the "fear index". This gauges investors’
expectations of future volatility, and on May 21 it spiked to 48.20 intraday…a
level we haven’t seen since the market lows of March 9, 2009.
Source:
finance.yahoo.com
Get your shopping list
ready when the downtrend reverses. Looking forward, the best opportunity for
earnings growth domestically will be in small and mid-cap value stocks. As a
reminder, look at SPDR S&P MidCap 400 ETF (MDY)
and iShares S&P SmallCap 600 Value Index (IJS). Both are good options for tracking small
and midcap indices.
Disclosure: Positions in MDY and IJS. Rezny Wealth
Management may hold investments in above mentioned securities; positions can
change at any time.
About the
author: Brian Rezny