SELL HIGH AND BUY LOW
- 20 hours ago
- 8 min read
Updated: 2 hours ago
Buy low and sell high has been the mantra for stock market investing forever. It makes sense, right?
If we get into the stock market at a low point and sell when stock prices are much higher, we can lock in those gains.
This saying applies well to buying individual stocks but not so much for stock index funds.
Most of you know by now, that individual stock pickers are not able to beat the performance of a simple S&P 500 index fund. Why spend all the time and effort associated with managing a stock portfolio made up of individual stocks when you can get better investment returns by simply owning the best index funds?
With index funds, the industry experts tell us to buy and hold these funds forever. Other than dollar cost averaging into the fund, there is not an opportunity to buy low and sell high.
THE BUY AND HOLD STRATEGY
A core principle supporting the mediocre investing strategies of the financial services industry is “Buy and Hold.” Advisors argue that since the stock market always goes up in the long term (very true) that we all must simply “ride out” the bear market crashes and wait for the eventual rebound or recovery. I like to call this the “Buy and Hold and Suffer” strategy.
Buy and hold is a form of disciplined investing, as opposed to emotional investing, and I must acknowledge that disciplined investing is a good thing. Fear, if not held in check by discipline, causes people to buy into the equity markets at the top (fear of missing out) and sell at the bottom (fear of getting wiped out). This is consistently the worst mistake that most stock market investors make.
So, buy and hold is an improvement over the worst possible investing strategy—but should we settle for “better than the worst”?
The other benefit of buy and hold investing is that it teaches people to think long-term for their stock market investments. Buy and hold is a strategy for the long term. Many people mistakenly focus too much on short-term results from their stock market investments.
Simply “riding it out” does nothing to alleviate the financial or emotional suffering from bear market collapses. To watch your savings drop by 40% in a matter of months is extremely painful. Waiting six or seven years for your investment portfolio to get back to break-even could destroy your retirement plans, particularly for older investors.
The financial services industry has offered no viable solutions to the bear market problem. Their asset allocation approach offers very little downside protection in stock market downturns. Bonds lost as much money as stocks in 2022. And individual stock portfolios often lose more money in big declines than the broad stock market (S&P 500).
The S&P 500 Index is THE benchmark for investment performance. The S&P 500 has produced average annual gains of 10% per year over the last 100 years, 50 years, 30 years and 20 years.
While the long-term returns of the S&P 500 are excellent and consistent, the annual results are anything but consistent. The stock market is highly volatile. The market can drop by as much as 50% in a downturn.
Most investors can’t stomach these kinds of losses, so they are forced to invest in conservative investments like bonds that generate low growth rates.
A BETTER WAY TO INVEST
Most of you know by now that my Growth and Safety investing system utilizes the best index funds and that it sidesteps the ugly bear markets.
The industry has never offered an effective way to do this, so I was forced to create one. It was not easy, but I love a challenge.
My system is a data-driven computer model using millions of data points spanning 100 years of stock market history.
The model uses probabilities to measure stock market risk levels on a daily basis.
When the model detects changes in risk levels or changes in market cycles, the investment strategy adjusts accordingly.
The Growth and Safety system uses data over feelings and probabilities over predictions. Emotions are your enemy when it comes to investing. Markets are irrational in the short term which makes them impossible to predict over the next month, season or year.
When the stock market is in a growth cycle which is the case most of the time, we invest aggressively in these index funds. When risk levels become elevated, we start moving out of the stock market and into conservative interest-bearing assets like money market funds and treasury bills. And when the “coast is clear”, we begin moving back into the stock market.
The stock market moves in two distinct cycles – a growth cycle and a bear market decline cycle.
The good news is that the stock market is in a growth cycle most of the time (86% of the time). In the growth cycle, the S&P 500 posts annual gains of around 17% - much higher than its long-term average of 10% per year.
The bad news is that in the bear market decline cycle produces annual declines or around 37%. Even though the bear declines only represent 14% of market trading days, they are extremely painful.
Comparing my Growth & Safety system’s performance to the S&P 500 in the growth and bear decline cycles shows you why and how my system posts such strong results.
Losing less in major market declines generates higher overall returns. It is simple math.
My model can outperform the S&P 500 in growth cycles because we selectively use higher growth index funds like the Nasdaq-100 when the market is in a strong growth cycle.
GROWTH | BEAR | ||
CYCLE | DECLINE | AVERAGE | |
86.0% | 14.0% | ||
S&P 500 | 17.5% | -36.0% | 10.0% |
MY SYSTEM GROWTH & SAFETY | 19.0% | -11.0% | 14.8% |
Because losses from the Growth and Safety system are much smaller, recovery times are faster. A 10% loss requires an 11% gain to get back to even while a 40% loss requires a 66% gain.
My clients are very happy with the high investment returns, but I think they appreciate the Safety part of my system even more. Having peace of mind that your life savings are protected allows retirement investors to sleep better at night.
SELL HIGH AND BUY LOW
Not only does my system avoid big losses, in most bear markets my system makes a profit from the volatility.
The 2020 Covid crash was the perfect scenario for my Growth & Safety model. The S&P 500 started dropping in late February and hit bottom in late March after falling about 34%. The trend reversed quickly at the end of March and gained back all those losses by late August.
My Growth & Safety model started getting out of the stock market on February 24th and was completely out of the market on February 28th – avoiding most of the big losses that happened in March.
The sales to get out of the S&P 500 index fund (IVV) happened at prices between $323.83 and $295.81. After the S&P 500 reversed course in late March and climbed back to $275.00 on April 8th, my system triggered a buy to get fully back into the market.
We sold high and bought back in at a lower price – making a profit as a result. This is how my approach uses the “buy low and sell high” mantra in reverse. It is great avoiding the large losses that happen in severe bear markets, but it is even better when you can turn that volatility into a profit.
To keep the 2020 analysis simpler, I compared the S&P 500 results to my system using only the S&P 500. Since technology stocks were doing so well in 2020 (everything going online due to Covid), my model was also invested in the Nasdaq-100 (QQQ). As a result, the actual results for 2020 from my investing system were much higher.
Because we sold our stock investments at a higher point early in the downturn, we had a much higher level of cash to buy back in at the lower prices. When you ride the collapse all the way to the bottom, you don’t have any extra cash to buy back in at the lower prices. In fact, you have much less money which means you need huge percentage gains to get back to break even.
As a result, my Growth & Safety system posted a 30% gain for the year 2020 compared to the 16% gain for the S&P 500 (not including dividends).
The concept is very simple. The math and the algorithms that support the model are quite complex.
Many others have tried to do this, but I have not found any with appealing results. The others use a variety of approaches, but they typically rely on standard industry trending statistics that are based on moving averages (MACD, RSI, etc.).
My analysis proved that using standard moving averages is not effective. I was forced to create my own trending and momentum statistics to make my model work. It was a tremendous amount of work to create my own proprietary momentum variables, but it was well worth it.
SUMMARY
The investment services industry leaves you with a limited set of mediocre investment options and they charge high fees for these poor solutions.
Cycling through financial advisors will not get you anywhere. Some people go through three or four different financial advisors and still end up with mediocre investing results.
Despite what the industry has told you, you can have Growth AND Safety when it comes to your retirement investments.
You do not have to settle for mediocre 6% to 7% returns, nor do you have to endure devastating losses by simply “riding it out” during markets crashes. Most people know intuitively that the “Buy & Hold & Suffer” strategy doesn’t make any sense.
It is possible to get higher investment returns and lower your risk.
By potentially doubling your investment returns, you can dramatically increase your income in retirement – without taking on more risk.
If you think you and your family could benefit from higher returns and less risk, schedule an appointment by clicking on the link below
The purpose of the call is to explain how you can start improving your investment results right away and to see if my system is a good fit for you. We will provide more information about this better way to invest and answer all your questions.
There are a couple of ways that you can utilize my Growth & Safety system right from your own brokerage account. You don’t have to send your money to some advisor you don’t know. You maintain complete control of your money.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.