A recent cartoon in my daily newspaper showed two guys sitting in a bar. One is saying to the other: "I did learn something from my broker...how to diversify my investment losses."
While this struck me as funny, there is certainly an element of truth to it judging by the number of tragic e-mails and phone calls I have received over the past couple of years.
This was brought home even more so by a reader who responded with strong disagreement to one of my articles. I advocate a methodical, disciplined approach to investing in no-load mutual funds. It keeps me invested during up markets and on the sidelines during down markets. It was exactly this approach that got me and my clients out of the market in October, 2000 and put us back in to take advantage of the April, 2003 upswing.
Judging from the reader's e-mail it appears that he works for a major bank and is adamant about Buy & Hold and Dollar Cost Averaging. Maybe it's the approach he has chosen and he doesn't like hearing that the emperor is wearing no clothes. Nothing personal, honestly, but I find it incomprehensible that anyone, after the bear market and the financial disasters most people experienced, can even consider such theories. The results are just too black & white.
Here are his three main points:
It appears that the only thing that I can agree with him on is, as he says, there is no reasonable way to "know" whether the market is going to be up or down. However, this statement also underscores that he is not familiar with trend tracking methodologies and the idea that one does not need to "know" or "predict" in order to make profitable investment decisions.
I've put together the composite for my trend tracking index in the 80s and it has consistently served me and my clients well by getting us into and out of the markets in a timely manner.
The reader cites Warren Buffett's success. Sure, he is legendary, but remember that he made most of his fortune during one of the greatest bull markets. He is probably now considered beyond good and evil. But what about the numerous stories in the press over the past 3 years of the heavy losses he sustained in Coca Cola and other stocks, by stubbornly holding on to this positions. When you have enough money invested in a wide range of holdings, you become almost bullet proof. Do you fit in that category?
Furthermore, Buffet has resources available that the investing public simply does not have. Saying that he is successful only because of his buy and hold approach, and everyone following this technique will be too, is an oversimplification and does not factor in all the issues.
How many non-millionaires have enough spare capital to keep buying and holding and buying some more while stocks plummet? How long can they wait for the upswing when their cost-averaged holdings will start to show a profit? Do the math! Yes, the market will eventually turn up. But will it recover enough fast enough to reverse your losses in time to do you any real good? If you're 20, then maybe. If you're 60, who knows?
I have received countless e-mails and phone calls from individuals who have been led astray by brokers, financial planners and others using buy-and-hold and dollar cost averaging. Stories abound of retirees having to go back to work just because someone told them that "the market can't go any lower" or "let's dollar cost average."
As for his last point, when I gave the signal to cash out on October 13, 2000, it had nothing to do with either luck or intuition. I had no clue how good of a call that would be; I simply let my indicators be my guide. They pointed to a sell, we considered, and then followed through based on our experience. We held true to our philosophy and kept our emotions, speculations, fears or greed out of the equation. This disciplined approach is what I advocate.
This year it has led us to buy back into the market on 4/29/03. And my detailed analysis and evaluation of a range of funds led us to select some of the best; my top fund being up some 50%.
So, not to be cynical, but to me dollar cost averaging is just a way to spread the pain over a longer period of time and to cloud the obvious with the hope the market will turn around tomorrow. After all, it can't go any lower. Can it?
About The Author
Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: http://www.successful-investment.com; http://www.successful-investment.com
professional maid services Park Ridge ..Investors who exclusively use broadly diversified, no load mutual funds... Read More
Index Fund Trading can be one of the most profitable...or... Read More
Picking a beaten-down stock requires a different kind of selection... Read More
A stock market index is a statistical measure of changes... Read More
Question: How does it get better when it gets worse?Last... Read More
Just 30 years ago the stock market was a shadow... Read More
The Macedonian Stock Exchange (MSE) is not operating successfully. True,... Read More
Several times each month I am solicited by various market... Read More
The Bollinger Band theory is designed to depict the volatility... Read More
Every broker and financial planner will tell you that you... Read More
Carefully thinking through your goal as a trader is of... Read More
The stock market often closes a week in the middle... Read More
As the man said, "I've got some good news and... Read More
Stocks breakout from properly formed bases everyday but many investors... Read More
No, this is not a symbol for some Latin number.... Read More
Most people think the stock market is a zero sum... Read More
Even if you don't own any of their stock or... Read More
An investor can find and research the best stock on... Read More
The stock market has not been very kind to your... Read More
Professional stock options traders use the term lean to refer... Read More
I have watched my cat play with a bag of... Read More
Among the largest forces that affect stock prices are inflation,... Read More
I love roller coasters. The steeper the better. High and... Read More
If you're a normal human being, your need to feel... Read More
Wall Street has been preaching for years and years to... Read More
cleaning lady near Lincolnshire ..It is wonderful to be alive in the information age.... Read More
So you're started trading, you bought some positions with your... Read More
Much like the middle child, mid-cap stocks have long struggled... Read More
What can I expect to make my first year of... Read More
Mutual funds by definition are a mixed bag of stocks,... Read More
The Dow Theorycharles h. dowcharles h.... Read More
When you become interested in a stock or mutual fund... Read More
The Macedonian Stock Exchange (MSE) is not operating successfully. True,... Read More
It is difficult to make money in a bull market,... Read More
The higher the market goes the more confusing are the... Read More
Question: How does it get better when it gets worse?Last... Read More
Since I can remember, and that's a long time ago,... Read More
Have you been listening to the talking heads on CNBC-TV?... Read More
I go to the Money Show every year to visit... Read More
Let's discuss commodities; with the latest Enron situation, it is... Read More
The trash business in its efforts to cook their books... Read More
Reach in your pocket and take out that big roll... Read More
Look back over the years and try to remember how... Read More
It takes a total mental commitment to the task. It... Read More
It has been said that low cost or even free... Read More
(1) Stock Market is Tough Place to Make Any Money... Read More
There are so many kinds of work that needs to... Read More
I would like to share with the reader an article... Read More
As one of my regular readers you know I have... Read More
Now where have I heard that before? I know. It... Read More
Stocks & Mutual Fund |