Thursday, September 02, 2010

Market Timing Outperforming Buy-and-Hold


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Discover a technique that outperforms Buy and Hold strategies by a factor of 84 times.

But First Ponder these Questions


Have you ever wondered why banks and mutual fund companies religiously preach "Buy and Hold" as the only investment strategy for long-term success?

Or, why the average management expense ratio for mutual funds is twice the cost of Exchange Traded Funds?

Especially when you consider that studies have show less than 12% of mutual funds can actually outperform the long run returns of benchmark indexes like the S&P 500?

* Maybe . . . having buy and hold clients maximizes mutual fund salesman trailer fees and commission earnings?

* Maybe . . . mutual funds are not set up to handle short term sales and redemptions effectively, and therefore need to create a compelling argument to practice Buy and Hold?

* Maybe . . . having buy and hold clients is easier to manage and allows them to focus their time on looking for more new clients to pay them even more trailer fees?

Market Timing" is the Future

There is no doubt that buy and hold has worked well for investors during bull markets, but what about sideways markets and bear markets? With the baby boomer generation approaching retirement years over the next decade, many economists are predicting that a net REVERSAL of capital flows will have a significant negative
effect on the markets, as well as making it more volatile.

Boomers will become net sellers of their invested capital as they liquidate long positions to finance their retirement cash flow needs. Wouldn't it make sense to adopt a strategy that works in up, down and sideways markets?

Consider these studies:

"The Performance of Professional Market Timers" Journal of Financial Economics, November 2001 reviewed the actual performance of professional market timers over a period of 9 years and concluded:

* there is evidence of significant ability to time the market over all tests and portfolios

* most deliver returns that exceed buy-and-hold returns

* had lower levels of volatility compared to the S&P 500 index

"The Truth about Market Timing" Barrons article, Nov,5,2001 cites a study showing that since 1966 the buy-and-hold investor would have turned $1.00 into $11.71. During the same time period, if the investor missed the 5 worst days of each calendar year, that
same $1.00 becomes $987.12. A full 84 time the buy-and-hold amount!

Obviously, it is not possible to miss the worst 5 days of each year, but it highlights the point that market timing preserves your capital during downtrends so that more of it can be invested in future market upswings, which has a multiplier effect on your portfolio.

Consider these facts:

* 88% of Mutual funds fail to meet the S&P500 index return

* Mutual funds fees are TWICE the cost of ETFs on average

* High MER fees chew up a portfolios value over time when utilizing a buy and hold approach in sideways or downward markets

* Statistically speaking you are better off buying the S&P500 Exchange Traded Fund Index than trying to pick the next mutual fund that will outperform the index

* Most mutual funds are stuck having to ride down major market corrections, as they are not permitted by their investment policies to liquidate their entire holdings

* The mutual fund industry focus on "relative" performance measures has lost sense of investors needs. Do you know of anyone that would celebrate losing only 30% of their portfolio value in a given year? Fund companies brag of these returns as long as the benchmark index they measure their performance against has lost more!

The Benefits of Market Timing

* Timing the entry of new positions into strong trending sectors allocates your capital into the strongest segments of the market

* Timing strategies are usually mechanical in nature, and simply follow what is actually working in the market

* The biggest benefit of market timing is its ability to preserve your capital during downward retraction movements in the markets and sectors. The ability to preserve capital during these periods has a powerful and dramatic effect on your portfolio value over the long run.

Click here to learn about another simple capital preservation strategy that can MAGNIFY your portfolio results substantially over time.