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
monthly home cleaning Buffalo Grove ..There are many important things you need to know to... Read More
Now that you have some money burning a hole in... Read More
Spread trading is a technique that can be used to... Read More
When it comes to stock market trading it PAYS to... Read More
The following are a list of nine things you want... Read More
There are many good penny stock investments available, which could... Read More
Hedge current portfolio positions and gain access to capital resources... Read More
One Saturday morning, while he was sitting at his computer... Read More
Two weeks ago I wrote about what the Securities and... Read More
Both the stock market and oil prices rallied recently, which... Read More
Four blind men were asked to give a description of... Read More
If you're a normal human being, your need to feel... Read More
When it comes to 401k's there is an overabundance of... Read More
Have you ever thought of investing? Do you have a... Read More
When is a dividend not a dividend?The latest thing "conservative"... Read More
With the stock market stubbornly refusing to settle down and... Read More
If you have been watching the stock market at all... Read More
In his wonderful book, 'Multiple Streams of Income', best selling... Read More
(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More
Let's hope you did not have any of the Enron... Read More
One of the main reasons many of us get into... Read More
The greatest stock market myth is the idea that investing... Read More
How often have you come across an advertisement or e-mail... Read More
On the 40 year journey through the turmoil of a... Read More
As one of my regular readers you know I have... Read More
scheduled maid service Mundelein ..If you've ever flipped on the television to CNN Financial... Read More
The fight continues to rage among traders who use technical... Read More
How is it possible that trash Companies are posting less... Read More
If you are going to be a winner in the... Read More
As GuruFocus updates the stock buys and sells of gurus,... Read More
One of the main reasons many of us get into... Read More
On Friday or Saturday evening my wife gets a movie... Read More
Recently I watched my favorite football team lose a vital... Read More
I made my very first investment in the stock market... Read More
Because there are so many stocks that are NOT paying... Read More
Should the market turn against you, it is important that... Read More
In 1960 an engineer working for a watch company in... Read More
Why? Because I am going to shatter your conventional wisdom... Read More
For the year 2000 we have seen hundreds of mutual... Read More
"If you don't know where you are going, any road... Read More
1. Do not spread your money too thin.My friend has... Read More
Are hedge funds a suitable investment for you? Hedge funds... Read More
I'll bet with almost anyone that has stocks or mutual... Read More
You have a lock on your house. You have a... Read More
This article describes the model of a natural relationship between... Read More
The stock market has not been very kind to your... Read More
One of the big advertising kicks today from mutual funds... Read More
Have you seen all those big full page ads for... Read More
Ever notice how behavior in one area of life can... Read More
This is a rather simple strategy with which I am... Read More
Stocks & Mutual Fund |