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
same day cleaning service Des Plaines ..What is the Series 7 Exam? If you... Read More
Never lose money in the stock market again. Yeah, I... Read More
Well maybe that's overstating it a little, but it's certainly... Read More
A colleague of mine just returned from a scuba diving... Read More
We have two candidates for president that have really different... Read More
Many people would like to diversify their portfolios to expand... Read More
Humpty Dumpty had a great fall and all the King's... Read More
Ever wondered what is a mutual fund? A mutual fund... Read More
There are many important things you need to know to... Read More
Every successful trader has a winning system. There are of... Read More
The fight continues to rage among traders who use technical... Read More
Picture one of those clubs where only the real heavyweights... Read More
I was devastated!I just couldn't believe it. I was 10... Read More
(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More
"If you don't know where you are going, any road... Read More
Carefully thinking through your goal as a trader is of... Read More
The Bollinger Band theory is designed to depict the volatility... Read More
How many people went to a cash position this week?... Read More
This is an extract of an article which was first... Read More
Profitable day traders recognize that momentum trading is among the... Read More
If you don't know what a Roth IRA is then... Read More
A Guide to Using Stop Loss Orders Stop losses are... Read More
When it comes to buying a stock or mutual fund... Read More
If you don't know where you are going any road... Read More
Let's first define insanity. It is doing the same thing... Read More
home cleaning services Mundelein ..Economists know more about how the fragments of society work... Read More
Every publicly traded company is required by the SEC(Securities and... Read More
The greatest stock market myth is the idea that investing... Read More
Money management starts with protecting your capital, realizing profits and... Read More
Now that you have some money burning a hole in... Read More
How is it possible that trash Companies are posting less... Read More
TOO OFTEN, INVESTORS SIMPLY CHOOSE TO follow the crowd. This... Read More
Since I can remember, and that's a long time ago,... Read More
Quick, look out the window. It's raining. No, the sun's... Read More
Caught in a whirlpool and being sucked under. No life... Read More
Carefully thinking through your goal as a trader is of... Read More
Alfred Winslow Jones started hedge funds in 1949. He was... Read More
Exchange Traded Funds (ETFs) are growing. Investors are choosing low... Read More
Over the past few months, several investment professionals have brought... Read More
"Buy and hold" is one of the most heralded investment... Read More
As an investor you will want to check out any... Read More
Ever done any whitewater rafting or canoeing? Long periods of... Read More
If you're a normal human being, your need to feel... Read More
There are many important things you need to know to... Read More
Never lose money in the stock market again. Yeah, I... Read More
We need a rabbit!This was a pretty horrible week for... Read More
"If you don't know where you are going, any road... Read More
I often play a little game with myself when I... Read More
(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More
What! Me worry?Many of you remember the cover of MAD... Read More
Stocks & Mutual Fund |