Market Timing: Should You Attempt It?

http://news.morningstar.com/doc/article/...

Top 210. Apr 7, 2002 1:03 PM

» Kirk - Buy and Hold Is Alive and Well

Conclusion: Why bother with market-timing when the basic principles of investing are really that simple?

Buy and Hold Is Alive and Well
by Pat Dorsey | 04-03-02

It shouldn't come as any surprise that more than a few readers wrote in to voice their opinions of last week's jeremiad against market-timing. I'd say the responses were about 60% anti-timing, 30% mildly pro-timing (along the lines of "so-and-so made this call that got me out of the market in early 2000"), and 10% rabidly pro-timing. Excepting the latter group, the e-mail I got was quite thoughtful. Since many of them raised similar points, I thought I'd answer them in a public forum.

Since the most common pro-timing response I received raised the question, "So where has buy-and-hold gotten anyone since the bubble popped in 2000, huh?", let's get that out of the way first. The only "bubble" that popped was a large-growth/tech/dot-com bubble--which means that unless you were overloaded in the aforementioned asset groups, the past two years haven’t been nearly as nasty as the headline indexes would indicate. Although the Nasdaq is off more than 60% and the S&P 500 is down about 17% since March 2000, bonds are up about 20%, REITS have zoomed almost 40%, and both large- and small-value have also done quite well.

What all this means is that a diversified portfolio would have done a lot better over the past couple of years than overexposure to large growth and tech--though such a portfolio would have lagged the big indexes in the late 1990s. In other words, the lesson of the late-1990s bubble is not that "buy and hold" is dead, it’s that diversification and portfolio rebalancing are alive and well. The way to mitigate risk is to diversify your assets, not to try and guess when you should be in or out of the market entirely.

Whenever you start worrying that you're underperforming the other guy because he's put all of his eggs in one basket, just remember that what goes around, comes around. Over the long haul, a diversified portfolio will give you more bang (reward) for your buck (risk) than one that's loaded up in one asset class--or one that tries to hop in and out of the market based on some market-timing mechanism. Successful investing is about putting the odds in your favor, and market-timing doesn't do that.

Another common theme among the responses I received concerned the wisdom of shifting around assets to take advantage of temporarily under- or overvalued sectors or asset classes. As one reader wrote:

"It seems to me a sensible approach is to stay invested (so as not to miss the good days) but to move a bit when one sector seems to have run its course…. I'm a high-tech investor (retired from a career in it) and so my bias is to hold stocks there. I know the business, products, and companies. But I can also see when valuations are way out of hand and consistently pulled money out as the boom was raging. Some of the other (i.e. non-high-tech) issues had been languishing during the boom and were dirt cheap in valuations."

Although die-hard efficient-marketeers might disagree, I would wholeheartedly say that selling high and buying low isn't market-timing--it’s just good common sense. For the more passive investor, the easiest way to do this is to pick an asset allocation and stick with it, even though that means selling winners and buying losers. When an asset class gets more than 5% or so above your target allocation, trim back and plow the proceeds into areas that have been underperforming. The laggards comprise a smaller proportion of your assets, and they’re probably cheaper than the portions of your portfolio that have been rocketing ahead. Essentially, rebalancing your portfolio annually is simply a good discipline that forces you to buy low and sell high.

For those of us who take a more hands-on approach to investing, I'd still say that moving out of expensive areas of the market and into cheaper ones isn’t market-timing by any stretch of the imagination. After all, if Mr. Market wakes up one morning and offers to buy an asset that you own for far more than you think it’s worth, you're usually better off taking advantage of his offer than waiting for a better one to come along. On the flip side, if investors are stampeding away from certain areas that still have strong long-term prospects, then you're buying assets for less than they’re worth. Nothing wrong with that--as long as you do it in moderation, rather than with abandon.

The big difference is whether you're looking at things from the top down or the bottom up. Generally speaking, market-timers advocate either being in the market or out of it, and that's just way too simplistic. "The market" is a complex beast made up of lots of different pieces--some of which might be attractively valued and some of which might be expensive at any given point in time. Instead of trying to predict where the whole morass is moving, it makes much more sense to focus on the individual pieces, and assess them individually.

This is why I get so riled up when people ask me, "So is now a good time to be in stocks?" Well, heck, I don't know. Do you mean big companies or small companies? Cheap stocks or "strong" stocks? What about REITs and bonds--or those long-suffering international stocks, for that matter?

At the end of the day, investing is about not keeping all of your eggs in one basket. It's about buying new eggs when they're on sale, throwing out the rotten eggs once in a while--and occasionally selling eggs when the market offers you Faberge prices for Grade A jumbos. Why bother with market-timing when the basic principles of investing are really that simple?

-- posted by Kirk

Top 211. Apr 7, 2002 3:30 PM

» soonertimer - Re: Buy and Hold Is Alive and Well

In response to message posted by Kirk:

Okay, so this author supports diversification! What he avoids is an examination of the validity of the classic, traditional buy-and-hold strategy - namely, buying the industry leaders in the strongest growth sectors and holding them forever.

Yeah, buying small-cap value in 98-99 looks good now, but that is not properly termed as "market-timing". That is employing a "contrarian" strategy - which should be contrasted with "momentum" investing - and IMO should not be confused with "market-timing".

-- posted by soonertimer

http://www.washingtonpost.com/wp-dyn/art...

Top 212. Apr 22, 2002 7:11 PM

» bob90245 - Washington Post Article

A Simple Strategy: Stay in the Market

By James K. Glassman
Sunday, April 21, 2002

Everyone's favorite high-tech energy company goes bankrupt. Oil prices rise. The Middle East erupts. Housing starts drop. The federal surplus turns to deficit. Skeptics target the world's most valuable corporation. The New York attorney general claims massive fraud by stock analysts. What a mess!

Yet on Tuesday, with no warning, the Dow Jones industrial average shoots up 208 points, its biggest gain in seven months. The tech-heavy Nasdaq, Japan's Nikkei, Britain's FTSE, South Korea's Kospi and practically every other market in the world score handsome increases as well.

Why? Pundits point to a few decent earnings reports ("Better-than-expected results at General Motors and Sprint goosed the blue chips," indelicately wrote Igor Greenwald of SmartMoney.com), apparent Mideast progress and scattered upbeat economic numbers. But pay no attention to these attempts at explanation. No one can consistently predict the short-term ups and downs of stock prices. Even at the end of a day like Tuesday, it's rare that anyone can explain why the value of the tens of thousands of companies listed on the world's exchanges rose, on average, by about 2 percent.

"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two," the most successful investor of the 20th century wrote in Fortune magazine last December. And if Warren Buffett hasn't the faintest idea, why do you think you do?

Don't despair. The short-term unpredictability of the market dictates a simple and effective strategy for small investors. I call it "Being There." Since, by their nature, stocks are prone to dramatic, unexpected moves, the trick is to stay invested all the time. Jumping in and out of the stock market -- even during periods when you might think shares are overvalued or the world stage is overwrought -- is a sure recipe for poor performance.

The most powerful evidence for Being There is a study called "Quantitative Analysis of Investor Behavior," updated every June by Dalbar Inc., a Boston research firm. Using a sophisticated computer model, the study looks at cash flows into and out of mutual funds and determines the real-life returns achieved by small investors. The study, says the firm, "was the first to investigate how mutual fund investors' behavior affects the returns they actually earn."

The results are heartbreaking. Between 1984 and 2000 (the most recent figures), stock-fund investors achieved average returns, including dividends, of just 5.3 percent a year. But investors who simply bought and held the stocks of the Standard & Poor's 500 index, a proxy for the market as a whole, achieved average returns of 16.3 percent a year. In other words, over the 17-year period, the typical investor's initial $10,000 grew to $24,000 while $10,000 invested in the S&P grew to $140,000.

Why the gigantic difference? Bad market timing, pure and simple. The problem was not that investors picked the wrong mutual funds but that they jumped in and out of the market -- and weren't around when the biggest gains were made. "Investors follow the trend in an intuitive way," Louis Harvey, president of Dalbar, told me. "They start piling their money in when markets are up, and they tend to stop piling it in when things are soft, as they are now."

Actually, Harvey said, the data show that investors are getting better. "As a group, they have become more tolerant" of risk, he said. Still, the results since 1984 are truly abysmal. The average frenetic investor would have done better by simply stashing money in Treasury bills, which returned 5.8 percent annually during the period.

Professionals who employ market timing as an investment strategy don't do much better than amateurs. Timer Digest, a newsletter edited by Jim Schmidt, follows the actual buy-and-sell recommendations of newsletters that provide their readers with market-timing advice. For the 10 years that ended Dec. 31, 2000, only one newsletter out of the 112 that Schmidt follows managed to beat the S&P 500 benchmark.

That newsletter was the Blue Chip Investor, edited by Steven G. Check of Check Capital Management in Costa Mesa, Calif. And Check, who beat the S&P by only a few tenths of a percentage point annually, writes in his utterly sensible list of seven "Realities and Expectations" for clients: "We aren't in the business of forecasting the economy or short-term market moves. The future is never clear. We don't buy or sell stocks based on what the market may do."

Does Check sound like a certain sage from Omaha? It's no coincidence. According to Check Capital's Web site (www.checkcapital.com), the company "manages your assets under an investment philosophy like that of investment giant Warren Buffett." In fact, Check is not really a market timer at all, which means that the final score is Market 111, Timers 0.

Okay. If the Being There strategy is so effective, then shouldn't all investors just buy a bunch of index mutual funds, instruct their banks to feed new money into those funds every month or quarter, and then just relax and rake in the profits? Well, yes.

Another choice is buying exchange-traded funds, which are portfolios that are bought and sold just like individual stocks on major exchanges. Each ETF tracks an index. For example, Standard & Poor's Depositary Receipts (which trade on the American Stock Exchange under the symbol SPY and are nicknamed "Spiders") track the S&P 500, as do iShares S&P 500 (symbol: IVV). Diamonds (DIA) mimic the 30 stocks of the Dow Jones industrial average and trade at 1 percent of the price of the Dow (when the Dow is 10,300, a share of DIA costs about $103). There are ETFs that track the small-cap Russell 2000 index (IWM) and ETFs that track the S&P Europe 350 (IEV) or the global MSCI EAFE index (EFA).

A major appeal of these ETFs -- as well as of many index mutual funds -- is their low expense ratio. They charge investors an average of about 0.2 percent, or 20 basis points -- compared with 140 basis points for the average fund managed by a real human being. That's a huge difference for long-term investors. The Securities and Exchange Commission offers a handy calculator on its Web site (www.sec.gov/investor/tools/mfcc/get-started.htm) that figures total mutual fund expenses over time. For example, I assumed an investor started with $10,000 and got returns of 11 percent annually (the historic average) for 10 years. With yearly expenses of 1.4 percent, the $10,000 grew to $24,660, but with expenses of 0.2 percent, it grew to $27,831 -- or 13 percent more.

Don't forget, however, that you have to pay your broker a commission to buy an ETF while you can go directly to a firm such as Vanguard to purchase an S&P 500 index fund with a low expense ratio. (Both Spiders and Vanguard Index 500 charge 18 basis points in expenses.)

Also, be aware that, while ETFs and index funds are attractive, they will never beat the indexes -- which is a feat that good mutual fund managers can accomplish. After accounting for expenses, over the five years ended March 31, the Vanguard Index 500 fund returned an annual average of 10.1 percent, but such core funds as Torray (14.1), Janus (10.3 percent), Legg Mason Value Trust (15.1 percent), Fidelity Growth (12.7 percent), T. Rowe Price Capital Appreciation (13.7 percent) and Vanguard's own Growth & Income (11 percent) did even better.

The third choice is your own portfolio of stocks. The trouble is that you need to buy at least 30 different companies, spread across a dozen or more sectors, to get safety through adequate diversification. For most small investors, that's far too many. My advice is to do what I do: Own about a dozen stocks plus a few ETFs or index funds plus managed funds.

But mind these two rules:

• Invest in stocks, ETFs and stock funds only if you can keep your money in the market for at least five years. Equities are too volatile for periods that are shorter.

• Stay invested the entire time. Yes, you should sell a stock if the underlying business has deteriorated. But quickly replace it with another stock. The times you are out of the market are far more dangerous to your wealth than the times you are in it.

Just last week, I received a newsletter from Franklin Templeton Investments that underlined, once more, the importance of Being There. Over the 10 years ended Dec. 31, 2001, the S&P returned an annual average of more than 12 percent. But an investor who missed merely the 10 best days out of the approximately 2,500 trading days during that period would have achieved returns of just 8 percent. An investor who missed the 20 best days, about 4 percent; the 30 best days, less than 2 percent.

No one can tell in advance which days these will be, so the best strategy is to own a diversified portfolio of stocks during each and every one of them.

-- posted by bob90245

Top 213. Apr 22, 2002 7:25 PM

» Kirk - Re: Washington Post Article

In response to message posted by bob90245:

Great article Bob!

I think that is great advice. I'd add that you should track how your portfolio of ETFs and Stocks do and compare it to the index funds over a full market cycle to see if you add value or subtract value by doing part of your portfolio on your own.

-- posted by Kirk

Top 214. Apr 26, 2002 8:02 AM

» Kirk - The World's Richest People

A stock picker, Buffett, is #2 on the list but no market timers made the list.

Also note that Bill Gates and Paul Allen made their money by NOT diversifying from MSFT stock for the #1 and #3 spots just like Larry Ellison of Oracle for #4 on the list.

The World's Richest People
Edited by Kerry A. Dolan and Luisa Kroll, 06.21.01, 6:30 PM ET
http://www.forbes.com/people/2001/06/21/...

The World's Richest People

It's been a rough year for fortunes large and small, thanks to the burst of the tech stock bubble and volatility in the stock market. But most of the richest of the rich managed to hang in there. We found 538 billionaires from 46 countries this year, with an average net worth of $3.2 billion. Some 46% of them saw their fortunes increase in the last year, while 37% watched them decline. (The remainder stayed the same).

#1 Gates, William H. III
#2 Buffett, Warren Edward
etc... Allen, Paul Gardner
Ellison, Lawrence Joseph
Albrecht, Theo & Karl
Alsaud, Prince Alwaleed Bin Talal
Walton, Jim C.
Walton, John T.
Walton, S. Robson
Walton, Alice L.

-- posted by Kirk

Top 215. Apr 26, 2002 12:17 PM

» SteveT - Re: The World's Richest People

In response to message posted by Kirk:

Anyone wanna wager if this list will be discussed to fill a little air time this weekend? smile

-- posted by SteveT

Top 216. Apr 26, 2002 12:24 PM

» KLR - Recovery for timing and trading addicts

New 12-step program for indexers
Commentary: Recovery for timing and trading addicts

By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 12:10 AM ET April 26, 2002

LOS ANGELES (CBS.MW) - I love surfing the web. You go looking for one thing, and you run across a new gem that's so good it makes you forget what you're looking for.

Like the "12-Step Program to Index Funds: Active Investors Anonymous," a unique 12-Step Program created as an investment education program. Perfect for active investors wondering why you can't beat the averages through market timing and active trading.

The site's the brainchild of Mark Hebner, the founder of Index Fund Advisors. IFA is a fee-based financial adviser using Dimensional Fund Advisors' (DFA) no-load mutual funds. One of the encouraging things about IFA is that they work with portfolios as small as $25,000. Most advisers won't touch anything less than $100,000 or even $250,000.

So here's an introduction to this new version of "The Program." Check it out if you're growing weary of active investing -- there's plenty more information available beyond this brief summary:

Step 1: Active Investors The original 12-Step Programs begin with an upfront admission that you're powerless and your life is unmanageable. IFA's program is what members of the original Program call the slower, "educational variety."

That is, the actual decision to swear off the bad stuff doesn't come until after you work through IFA's educational program on how the "disease" of market timing and active investing is negatively affecting the health of your portfolio. So jump in and test yourself.

Step 2: Nobel Laureates Fascinating reading here about research by Nobel prizewinners and their buddies, consistently proving that active investing is a losing game that can't beat the Modern Portfolio Theory's risk allocation principles.

This section summarizes the conclusions of the leading investment researchers, Sharpe, Markowitz, Modigliani, Malkeil, Fama and others like Paul Samuelson: "It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office."

Step 3: Stock Pickers Wall Street brags about the stock-picking talents of active managers. Unfortunately, it's random luck not skill. One study reveals "the chances of the active manager beating the appropriate index are one in thirty-six, the same long shot as throwing snake eyes at the craps table."

And William Bernstein says: "Ninety-nine percent of fund managers demonstrate no evidence of skill whatsoever." Eugene Fama is harsher: "I'd compare stock-pickers to astrologers, but I don't want to bad-mouth the astrologers."

Step 4: Time Pickers Market timing is the ultimate fool's game. Benjamin Graham put it this way: "If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."

Some other key facts: Over a decade, 88 percent of your returns will benefit from a mere 40 days. Similarly, 95 percent of market timing newsletters went out of business during one 12-year period. You cannot consistently pick the right time to be in or out of the market.

Step 5: Manager Pickers They expose one of the greatest myths: "The performance of managers is randomly distributed and lacks consistency." IFA notes that top money managers "attract about 75 percent of new mutual fund investors," yet within three years most "fall from the sky." So investors blindly chase these hot-shots, buying at peaks and selling on panic at bottoms.

Step 6: Style Drifters Active managers play fast and loose with your money, constantly churning portfolios. Fund data is perpetually old. Holdings were reported to the SEC months ago. That small-cap value, may be a mid-cap blend now. You don't know what's really in a fund. Or in your portfolio!

Step 7: Silent Partners Institutional money manager Ted Aronson knows: "Once you introduce taxes, active management probably has an insurmountable hurdle. We've been asked to manage taxable money - and declined." Between taxes, commissions and higher fees active managers lose about 40 percent of your returns.

Step 8: Riskese The "odds are, you don't know what the odds are," says Belsky and Gilovich, in Why Smart People Make Big Money Mistakes. Truth is, most investors don't know what they're doing. They chase short-term returns, follow hot tips, never truly understanding the impact risk and time have on returns.

Step 9: History Managers come and go, and fund performance drifts randomly and unpredictably over the short-term. Indexes are the only reliable source of data, going back 74 years. Indexes, not funds, help assess the long-term risks inherent in building portfolios.

Step 10: Risk Capacity You have a unique risk "capacity." Each investor's risk capacity is measured on five dimensions: Personal tolerance for risk, investment IQ, net worth, income and savings rate, plus your time horizon. Together they're your unique profile.

Step 11: Risk Exposure Earlier studies say asset allocation accounts for 92 percent of your return. DFA's cites research showing that the impact is actually more than 100 percent of your total return! Why? Because active management actually has a negative effect on returns. Finally IFA offers a set of 20 portfolios from conservative to aggressive, to fit your unique profile.

Step 12: Invest & Relax "The joy of living is the theme" of the 12th Step in the original 12-Step Program, "and action is its key word." Same here. If you understand IFA's first 11 steps, any rational investor will realize active investing is a losing game. So admit you're powerless over market timing and active trading and surrender to "The Program."

Active investor or confirmed indexer, you owe it to yourself to check out this new site. It's a continuing education program that deserves your attention. I wish it had non-DFA fund alternatives. For example, the three no-load "lazy-man's" portfolios we reviewed recently, or the Schwab, Vanguard and Fidelity indexing portfolios on FundAdvice.com. That aside, IFA's site is a fabulous educational experience, visually exciting, and fun to play in.

-- posted by KLR

http://www.bayarea.com/mld/mercurynews/n...

Top 217. May 3, 2002 6:20 AM

» Kirk - `Buy-and-hold' stock strategy may be outdated

Amazing story from the SJ Mercury.
Notice who they interview to say a `Buy-and-hold' stock strategy may be outdated".... a hedge fund manager and a mutual fund manager.

I should tell you that at the top, all the SJ Mercury could do is print stories about how much money people were making in the stock market and very few, if any, warnings about valuation.

`Buy-and-hold' stock strategy may be outdated, analysts say

By David A. Sylvester
Mercury News
Posted on Fri, May. 03, 2002

During the past 20 years, one style of investing in the stock market has become such a sacred dogma that you probably know the litany by heart:

Buy stocks for the long-term, invest in a stock index fund, and hold the investment through ups and downs. Most of all, don't worry, because stocks always beat other investments, like bonds or cash, over many years.

Since the beginning of the bull market in 1982, this approach has been something of a financial miracle. There's nothing like a 650 percent rise in the Standard & Poor's 500 over two decades to convince the average investor that he or she will do best by investing broadly in the market.

There's only one problem: The buy and hold approach hasn't worked for two years.

Stock market index funds have plunged sharply and are down again so far this year. Bonds have far out-performed stocks, and even lowly money funds -- those that invest in short-term Treasury bills -- have produced a positive real return.

What's going on?

``This is a trader's market, not an investor's market,'' said Toni Turner, author and president of TrendStar Trading Group.

In fact, a growing number of stock market professionals are starting to question whether the buy-and-hold approach will work for a market that looks more like the see-saw trading market of the 1970s. If true, this could have a profound impact on the millions of new investors who entered the stock market during the bull market. It could force them to revise their financial plans for everything from their children's college educations to their own retirement and financial security.

Old thinking challenged

Jim Paulsen, chief investment officer for Wells Capital Management, has noticed the shift in thinking and predicts investors will need to change their approach to make a profit from stocks in the new market. In April, Paulsen devoted his entire economic newsletter to the change.

[wanna buy a newsletter???]

``The buy-and-hold mantra which has come to dominate the investment culture is being significantly challenged,'' he noted.

It's premature to cast aside the ``buy-and-hold'' strategy entirely, Paulsen thinks, but large institutional investors are more concerned about their low returns on stocks recently. Pension funds, for instance, calculate their payments to retirees based on stock market returns -- if those fall below expected levels, the funds start searching for ways to make up the difference.

And some of those ways revive the old techniques of ``market timing,'' the ability to buy and sell stocks based on a forecast of where prices are headed. Such an approach became popular during the up and down market from 1966 to 1982 when the Dow Jones industrials fluctuated between 700 and 1,000.

``When I started in this business in 1982, all the wisdom of Wall Street was about market timing,'' Paulsen said. ``No one was suggesting the way to make money was to buy and hold.''

To make money, successful investors had to adopt completely different rules from the buy-and-hold approach. They sold during the rallies, tried to guess the correct timing for entering and leaving stocks and chose stocks from the right industry sector -- all of which requires considerable sophistication and effort.

Buy-and-hold adherents maintain that history shows such active trading produces worse results than just riding with the index. According to research provided by the Vanguard Group, even during last year's bad market, 61 percent of the mutual funds holding large capitalized stocks lost even more than the S&P 500.

Brad Barber and Terence O'Dean, two finance professors at UC-Davis, studied the returns from actively managed funds compared to the S&P index from 1991 through 1996 and found the managed funds did worse as a whole than the index. Using data going back to 1962, they found actively managed funds had an average annual return of 12.4 percent, compared to 14 percent for the S&P 500.

``Basically when you trade, you're betting against other market participants,'' said Barber.

However, this data does show some periods when active funds did better than the index -- between 1976 and 1982 and between 1965 and 1968.

Buy-and-hold `a cop-out'

For their part, traders say the buy and hold approach is a simplistic formula marketed by the mutual fund industry.

``It's a cop-out,'' said Chris A. Farrell, president of the Farrell Preferred Stock Arbitrage hedge fund. ``People think that buy-and-hold is buy-and-ignore-it. Managing your money is like a job, and the market doesn't give money away. It takes time and effort.''

It is true that academic research supports the ``buy and hold'' approach over long stretches of time, like 20 years or more. Theoretically, investors would do well if they wait out market droughts like the one stretching from the late 1960s to the start of the bull market in 1982.

The problem, according to David Rahn, president of Avalon Capital in Port of Redwood City, is that few people behave like the mathematical model. ``It's a great argument, but it's not practical because no one can do it,'' he says.

He, too, remembers the 1970s and found many investors left the market entirely after suffering through 16 years of no gains.

``By 1981, you couldn't convince anyone to invest in stocks,'' he remembers.

There are plenty of signs this stock market has changed. The Standard & Poor's 500 is down 6 percent since the beginning of this year, meaning it has to rise more than this by the end of the year to avoid having a third losing year in a row. The last time that the S&P 500 declined three years in a row was during World War II, and before that, during the Great Depression.

With its recent decline, the market has now lost four years of its bull market gains. In fact, more time has now passed since the S&P hit a new high than at any point since the bull markets began in 1982.

Right now, among the S&P 500 stocks, the biggest and strongest American corporations, half are trading at the same prices of 1997, producing five years of no gain.

And that's why some may start looking for other ways to invest. Paulsen believes the stock market is like the 1970s trading market, but for different economic reasons. Instead of high inflation and rising interest rates, the economy is experiencing low inflation and declining interest rates.

This could keep corporate profits -- and stock prices -- from rising very much. In this world, investors might do better to invest in long-term, high quality bonds, international stocks that could rise as the dollar weakens and stocks that pay dividends to improve their yields.

No matter what, this new world of investing is not likely to be pay investors quite like he booming markets of the late 1990s. ``There's nothing to replace a bull market in terms of absolute returns,'' said Paulsen.

My advice is to do some of both as I suggest in our "Welcome Message" here. Perhaps get some help from a newsletter writer such as myself that is up significantly since 1998 (My newsletter portfolio is up 197% since 9/30/98 vs the S&P500 which is up 12% over that same period) or look to a few, good actively managed mutual funds. But, start with the majority of your funds in index funds and then see if the activly managed part of your portfolio can beat the indexed part of your portfolio.

If you can beat the index funds, then continue to do it. If you fail after 5 or 10 years, then perhaps give up and try golf with the spare time.

-- posted by Kirk

Top 218. May 3, 2002 6:36 AM

» Rande - Re: `Buy-and-hold' stock strategy may be outdated

In response to message posted by Kirk:

There is a basic fallacy inherent in the statement that "the buy-and-hold strategy hasn't worked for two years." Buy-and-hold, by its very nature, must hold in both good times and bad. Patient, well-informed investors recognize that the long-term growth provided by equity investment is an average which consists of shorter-term ups and downs. It is the historical propensity for the ups to outnumber the downs over the long term which has made the patient approach a winning strategy. Combined with the inevitable failure of investors to time the market with anything approaching consistent accuracy, buy-and-hold remains the only prudent alternative for those who seek to build wealth over time. Key is a suitably diversified asset allocation based on a solid plan which allows for patience in the first place. Beware those who claim that buy-and-hold is outdated because it "hasn't worked for two years." They either miss the point entirely out of ignorance or rationalization, or know better but cynically pander to individual fear and greed anyway.

-- posted by Rande