MARCH 2018 Your SEASONS OF
WE A L T H
(520) 325-1600 WWW.SHEPHERDWEALTH.COM Investing
How We Strive to Avoid Winter With This Tactic
A fundamental principle of investing has always been “buy and hold.” This has been the standard for years, with the overwhelming consensus being that selling in any market condition will screw up your return. Investors who stay the course and never get out of the market will see everything work out if they invest for the long term. Some data backs this up. For example, if you miss the 10 best days of the market over a 20-year span, your return will be about half of what it would be if you didn’t miss those days. Therefore, buy and hold prevents you from missing those 10 days. But what if you miss the 10 worst days? It’s the opposite: You approximately double your return. The key we believe to potentially doing better is not about 10 days; it’s about navigating the 17 months where the markets on average lose 38 percent value, and it takes five years to get back to even. By explaining the seasons of investing, we can show you how Shepherd Wealth strives to do that. WINTER. This is a season of consistently dropping prices, like a recession in the economy. Losses abound in a winter market, and investors are hit extremely hard during this season. I’ve seen the stock market winters of 1987, 2000, and 2008 and the impact they’ve caused. With the buy-and-hold strategy, it takes five years on average to break even after a winter market, and those are trying times for any investor.
SPRING. During a recession, you’ll always hear the phrase “green shoots.” This is the indication that the market is moving out of a recession and toward its spring. Green shoots are new job gains or price increases for investors. They come up through the ground as the market begins to warm up. As the market continues to grow, momentum builds and creates an established spring of growth. SUMMER. As spring builds momentum, it turns to summer. This is when you can see consistent growth and steady increases, usually across all markets. This is generally a safer time for most investments, and it’s a great time to build wealth. FALL. Weakening prices and downtrends in the market characterize a fall season of investing. Often, buy-and-hold investors hold on until winter, when some may panic and sell low. We believe this is the time to harvest. This is when we ditch the buy-and-hold strategy that has been adopted by many firms and implement our process to help you avoid a winter with your portfolio. MOVING AVERAGE CROSSOVERS. We don’t guess or use suspect rumors to decide when to move your money. Instead, we use cold, hard math. Moving average crossovers are used by investors to spot market trends and can be a great identifier of when to enter or exit a specific investment.
Let’s think of it in terms of sports. By calculating batting averages in baseball for the last 20 days, you can identify whether a player is hot or cold. As the season progresses, that data set changes — a player’s 20-day average is going to be different from one day to the next based on their performance. The principle is similar with this strategy, and we use this concept to decide when to move money to mitigate losses. We mentioned that it takes an average of five years to get back to even with the buy-and-hold strategy after a bad winter. With our process, which is intended to preserve and avoid large losses, it could dramatically shorten the time to get back to where you were. Ned Davis published a book, “Being Right or Making Money,” that in one way investigates the flaws behind the buy-and-hold method. He explains that the best investors adjust and align with the market rather than staying wrong. Losing money is hard, and there is a severe emotional impact when your investments crash in a winter market. The buy-and-hold strategy pushes investors to their most dangerous place. Rather than sustain losses and take five years to break even, we help our clients mitigate the risk of winter by using this mathematical process. -Dave Shepherd
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