Recent market history has shattered all these easy investment rules. Because of the strength of the technology groups, all indexes have included a large amount of these stocks. The outcome has been a sharp decline in the averages because of the collapse of the technology group.
The market declined close to 17% this year, while the majority of stocks rose. The advance-decline line has been in a solid up trend since late 2000. (The graph of the advance-decline line is shown on the Internet version of this advisory, free for our subscribers.) This trend has been confirmed by the gains of many mutual funds emphasizing value strategy.
Another formula-based way of investing is “averaging down”. The idea behind it is to keep investing money as the market or stocks decline. I am sure that those who were heavily invested in technology in the past two years found out that this strategy was a license to go bankrupt. Besides, where could you find the money to invest when stocks decline more than 50%?
“Yes, what you are saying is right, but I am a long-term investor”. This is another great idea. It is based on the fact that the market produced a return of close to 7% in capital gains and 3% in dividend yield – 10% total return. The problem with this formula is that the market rose 20% half of the time since the beginning of this century. The other half showed little or no gains. The average of these two periods has been 10%. (Please see my book for more statistics on this subject).
The main issue for investors is to determine in which one of the two periods we are now. Being a long-term investor was not a great strategy from 1968 to 1982 because the market was absolutely flat during those years.
My point is that there is no easy formula. They eventually fail. I believe investors need to adopt a flexible investment approach based on the fact that market risk changes. By adapting the investment portfolio to the level of risk it becomes easier to manage the volatility of returns. Flexibility implies to be open-minded and accept the fact that no sector can outperform the rest of the market over the long term. This market has also taught that value eventually prevails.
This advisory attempts to implement these concepts. The fact that Hulbert singles us out as having a low risk money management style suggests we are successful in our endeavor.
(These comments were published in the issue of 10/29/01 of The Peter Dag Portfolio).
George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest
To find out more about my in depth views of the markets and my strategy just visit our website https://www.peterdag.com/ where you can subscribe to The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific investment portfolio.
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