How We Avoided The 2000 Bear

How We Avoided The 2000 Bear

October 13, 2000, will always be ingrained in my memory. The day after the long-term trend line of our mutual fund trend tracking indicator broke, I sold all of my clients' and my own invested positions and transferred the proceeds to money market accounts for security. I had learned to believe the figures, even though some others thought we were crazy.
When the stock market began to shake out in April 2000, all major indices saw a sharp decline from their peak followed by equally forceful efforts at rallies. Even typically slow-moving mutual funds behaved as wildly as tech equities due to the intense roller coaster ride.

Based on my indicators, the markets had stabilized in a discernible downward trend by October. Seated comfortably on the sidelines, we observed the development of what is currently regarded as one of the most severe bear markets in recorded history.
The markets had truly crashed by April 2001, but Wall Street analysts, brokers, and the financial media kept harping on what they saw as a fantastic buying opportunity. The public was consistently duped into believing in "V"-shaped recoveries, dollar cost averaging, and buying on dips.
By year's end, following the catastrophic events of 911, the markets had dropped even further, and individuals were starting to realize that the investing guidelines from the 1990s were out of date. It was common to hear investor tales of losses exceeding 50% of their portfolio value.
Why bring this up at this particular time? To demonstrate the idea that I have been putting forth nonstop for the past thirty years—namely, that a systematic, objective strategy with well-defined Buy and Sell signals is an absolute "must" for any investor.
To put it another way, you are not investing; you are simply gambling if you purchase an investment without a clear plan in place for collecting rewards should things work out well for you or for suffering a little loss should they not.
The last two and a half years have made it abundantly evident that being out of the market in bad times is just as vital as being in the market in good times. Need evidence?
InvesTech's monthly newsletter reveals that, between 1928 and 2002, $10 would have grown to $10,957 if one used the well-known buy-and-hold investment approach.
Your $10 would only be $154 if you were to somehow miss the greatest thirty months. But if you were able to avoid the 30 worst months, you would have received $1,317,803 instead of $10! Hence, my thesis: Long-term compounding is significantly impacted when the worst times are missed. There are instances in which staying out of the market is preferable.
Surprisingly, your $10 would still be worth $18,558, which is 80% more than the buy-and-hold plan, even if you missed the 30 best and 30 worst months. All of this results from the fact that stock values typically decline more quickly than they rise.
The bear destroyed more than 50% of many people's portfolios, but I and those who followed my advice avoided the brunt of the beast's rampage since Wall Street and most people tend to underestimate the importance of minimizing loss.
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