NOVATO, Calif., Jan. 11 /PRNewswire/ -- Every bull market produces its fair share of "proven" investment strategies that promise easy riches.
During the "Roaring 1920s," buying equities with high levels of margin debt was the norm among everyday investors. During the mega bull market from 1982 - 2000, it was the notion of buying & holding equity index funds at all times that became the cornerstone strategy for many investors, big and small alike. Unfortunately, both strategies led investors off a financial cliff during the next bear market!
In the following table, Winans International completed a study that compared 3 different equity investment strategies using S&P 500 Index funds from 1988 to 2009. Two different scenarios were analyzed. One in which all capital was invested at once (i.e., beginning lump sum investment), and the other of building up a portfolio gradually by investing $500 per month (i.e., dollar cost averaging). 90-day Tbills and corporate bond investments with laddered maturities were also included in the study.
Passive vs. Active Investment Strategies
Cumulative Percentage Returns (1988-2009):
Market 90-Day Dow Jones S&P 500 Index January Tops & Tbills Corp Bond Buy & Hold Funds: 200-day Barometer Bottoms Index Moving Average (Years) Rolled Laddered BLS DCA BLS DCA BLS DCA 1990 22% 34% 23% 5% 7% (3%) 33% 12% 1999 63% 114% 321% 186% 207% 117% 337% 187% 2002 72% 136% 130% 49% 189% 90% 248% 113% 2007 88% 167% 225% 110% 264% 142% 281% 122% 2008 89% 173% 92% 25% 263% 177% 256% 106% Annualized Returns 4.0% 8.1% 6.0% 2.4% 14.8% 8.2% 11.7% 4.6% Beginning Lump Sum (BLS); Dollar Costs Averaging (DCA)
1) While buying and holding S&P 500 Index funds worked very well during the great bull market run of the 1990's, the strategy quickly gave up its gains during the two significant stock market declines that followed. In other words, passively managed equity index portfolios went through a 22-year roller coaster ride that barely outperformed Tbills.
2) It was a different story for investors who bought & held corporate bonds. The components of the Dow Jones Corporate Bonds Index (laddered for 10 years) greatly outperformed the passively managed equity portfolio (8.1% versus 6.0%) over 22 years studied.
3) The last 22 years was a very profitable time for actively managed portfolios that switched from equities to cash during the 11 times when the S&P 500 Index traded below its 200-day moving average for at least one month, or the 5 separate occasions when the index posted negative results in January. Both active portfolios posted annualized returns at least twice at high as the passively managed portfolio and significantly outperformed the laddered corporate bond portfolio. The reason: The portfolios that used these time-tested tools posted solid annualized returns during market advances and protected portfolios during bear markets.
"Winans International has successfully managed client assets by using these technical indicators to navigate the equity markets and laddering bond portfolios since 1992. With many corporate bond funds consistently having high trading turnover and many of the largest mutual funds indexed to the stock market, it seems like the mutual fund industry has done it completely backwards, and investors have suffered for it. I think it is fair to say that the idea of 100% invested, 100% of the time in stocks will end up in history's ash heap of flawed financial logic," says Ken Winans, President & Founder of Winans International and author of the award-winning book "Investment Atlas."
Since 1900, the U.S. equity markets have posted negative returns 29% of the time. This historical fact means that a successful investment strategy must incorporate a policy for reducing investment risks during bear markets. In sporting events and military operations, overall victory only comes from executing a good offense AND an effective defense. The same is true of investing.
SOURCE Winans International