Monday, February 9, 2009

Food for Thought on Buy and Hold Strategy

The New York Times > Business > Image > The Current Market Is the Worst Yet

IN the last 82 years — the history of the Standard &
Poor’s 500 — the stock market has been through one Great Depression and
numerous recessions. It has experienced bubbles and busts, bull markets
and bear markets.

But it has never seen a 10-year stretch as bad as the one that ended last month.

Over the 10 years through January, an investor holding the stocks in
the S.& P.’s 500-stock index, and reinvesting the dividends, would
have lost about 5.1 percent a year after adjusting for inflation, as is
shown in the accompanying chart.

Until now, the worst 10-year period, by that measure, was the period
that ended September 1974, with a compound annual decline of 4.3
percent. . .

For the current period, the total return was negative, at minus 2.6 percent a year, even before factoring in inflation.

As you can see, if you are doing a Dollar Cost Averaging (DCA) into index ETF/fund, it is still important to rebalance and take profit off the table. If not, you might see that your returns have been negative this year if you had invested in the 19090.

For lump sum investors, you will have done worst than those who do not DCA. In this case, it means you should practise more of what I call a tactical allocation. When you know you are in a bear trend, shift as much as possible (or till your intended allocation) into other asset class like Cash or Bonds. For myself, I practise this as it is more fruitful for me. However, you need to exercise your own judgement call on the market and how much you want to allocate.

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