Investing in a Bear Market

I think that from a psychological point of view, dollar cost averaging is the way to go. We have some cash to invest and we’re going to spread it out a bit. That way at least some of the purchases will be at “the bottom” and we can feel good about it.

Reading Four Pillars and Random Walk etc is an excellent suggestion – the more knowledge you have about how the markets work and particularly past history, the better off you will be in rough times.

I’m in a similar quandary–I just lost my job and I’m not sure if I should roll over my 401k now, or wait a while.

I think at lot of this depends on your timeframe. I have 40 years until I want to take the money out. Do people honestly think that the market will continue to decline over that timeframe?

It does illustrate to me that those with a shorter timeframe need to be more cautious, and that will be me one day.

Excellent, excellent point Ada. Thank you.

JD – Thank you so much for all of the work you do here.
Having procrastinated about funding my SEP IRA-(who could blame me?-it’s at WAMU Investments,INC)- The October 15th tax filing deadline approaches. I have been paralyzed about what to do having paid my taxes based on my commitment to contribute a certain large (to me) figure.
I am having a free consultation this morning with a financial firm.
I am concerned about opening another SEP with Vanguard, Fidelity or American Century Funds. Can I open another SEP?
There will be a fee to move the money out of the WAMU account. So I am looking for a “no load”fund. Somewhere. Soon.

I just came over to say basically what Ada said, so I agree with that point! If you really can’t stomach the market right now, don’t use that as an excuse to miss out on a year of your annual IRA max. Even if you put the money into a CD within an IRA, anything you earn will be tax advantaged one way or the other.

Personally, I have continued to invest. I feel fine about our household asset allocation. I actually do not buy into the concept of holding only one or two index funds, and I have made different fund choices that are holding up pretty well. I even increased my exposure to stocks this entire year, as I feel that they are a bargain. I expect the market to go even lower. I don’t think we have hit bottom.

But how can you possibly buy low and sell high if you take all your money out at the slightest wobble? In a taxable account, this might be a good time to sell some things at a loss for tax purposes, but in the average retirement account with 30 odd years to go, I feel that sitting tight is the way to go.

Case in point – I had a 401(k) that I started in 2000. In 2001, my company did something shady as they went out of business, basically skimming contributions to pay bills. The accounts were tied up, frozen, until they repaid the money. So we couldn’t alter investments during the tech crash, and on paper, my account lost most of its value. I finally got around to rolling it over last year, and what do you know, I’d made a 12% lifetime return despite that fluctuation. I think this was helped by the fact that the missing money was repaid during a low point in the market, and I ended up with more cheaper shares.

So I am leery of trying to time the market, as everything I’ve read suggests that if you miss the few best days of the market, you basically miss out on maximum growth chances.

I just recently became eligible to contribute to a 401K. I actually think I’m quite lucky to be investing in a down market. I have had panic moments because I don’t know what I am doing – I’m not a professional. I’ve been investing in managed index funds and trying to hold onto my stomach.

I did cut back slightly on my contribution rate, but that’s because I need more cash on hand for a new car purchase soon.

I’ve been a fan of Andrew Tobias for awhile, but just read “Smartest Investment Book You’ll Ever Read” by Daniel Solin. I liked the exercise for determining your risk tolerance and wish I had something like that 20 years ago. He also has a 401(k) book out that I want to get my daughters. I see Peter Schiff has a new book out (and Harry Dent has one coming out in a couple of months) so will see if I have the fortitude to read them. I’m also interested in the “Little Book that Saves Your Assets” but the library doesn’t have it yet. I have the 4 Pillars book in the queue. What I am finding is that my risk tolerance isn’t what I thought it was, but this could be because I am near retirement. Thanks for the book recommendations.

This Peter Schiff guy.. pegged it dead on.

Personally, I took last weeks sell off as the incentive to finally set up my Roth IRA. I figured I was buying low, and by “dollar cost averaging” I can buy even more if it goes lower.

That said, I’m almost glad I didn’t have money in the markets when they dropped so severely. It would have been hard to stomach.

I am a firm believer that your philosophies are the true measure of your success. I think that you’ve given some good guidance for the new investor, as well as the seasoned investor. Right now, I keep most of my money in an ING account. But seeing how the market is going, I can’t help but feel like the stock market is a good starting place now for new investors. My lack of knowledge of the fact is reason enough for me to hold tight though. Any suggestions, otherwise?

Caleb
http://www.mefinanciallyfree.blogspot.com

My wife and I set up our retirement accounts in July of ’07. We made the bulk of our buys around September and October (when the market was at an all time high). I’m loving this downturn; I’m purchasing double the amount in my accounts than I was a year ago for the same amount of money. This downturn is driving down my cost basis and increasing my share position. I’ve got over 30 years before I retire. In my opinion, the market is on sale.

Buffett once said that a common fallacy among investors is a wish for increasing market gains. In fact the opposite is true; investors want the market to turn down to buy at better prices. That’s why we see Buffet back up his semi-truck of investing power and purchase huge positions in good companies in times like this.

s an investor you should be able to come to terms with the fact that you may gain or lose obscene amounts of money in a given day

As the Yale economist Robert Shiller has pointed out, stock values aren’t “money”. They are just guesses of the stock’s value based on what a very small group of people who are buying and selling today think the stock is worth at this moment. We extrapolate a value from that.

This is why, unlike money, stock value can just disappear and reappear.

“STICK TO THE SCRIPT”.. that’s my motto.. i’m not changing my investing strategy.. i will keep investing a fixed amount to my 401k and roth.. regardless of what the market is going through

i have 30 years before i retire so i will make adjustments later.. now is not the time

“It took 27 years for the stock market to recover after the first great depression. Are you perpared to wait for it to come back?”

I don’t retire for at least 35 years so, uh, YEAH!

@32: I totally agree with you.

People I work with are walking around talking about how their 401ks are down 20% so far this year and how they have lost money. What’s funny is… they’re in their 20s.

“When you put money into a market with this much volatility, anything other than cash and T-bills is just stupid.”

No, in fact the contrary is true if you are prepared to buy and hold investments long enough. This again is the illusion that you lose “money” when the market declines. You don’t. Money is involved only when you buy stock and when you sell it. It doesn’t matter how many ups and downs there are between those two events.

If you plan to buy stock and hold it for 20 years then the only thing that matters is how much you think it will be worth in 20 years. The current market just means you can buy the same amount of stock cheaper than you could a year ago.

I’m 26 (I just wrote 25 and then realized I was wrong… that made me feel old) I’ve been contributing 7% of my 28k/year to my 401k since about a year ago… one month after I was eligible by my company’s policy.

I have at least 40 years until I retire… maybe more if I really love what I’m doing at 65 and am in good health. I don’t want to worry about it, but I’m a worrier by nature so it does take a little bit of a pep talk to remember that what I’m actually doing is getting a screaming deal on something who’s value won’t matter much for 30 years.

the risk is small provided you buy AAA bonds.

The risk is supposed to be small, but all those bonds backed by real estate that are causing the current problems were rated AAA. The only really AAA bonds are US government issues. And you can argue about that.

The distinction between bonds and bond funds is a good one. The advantage of a bond fund is the same as a mutual fund, diversification. But, as was pointed out, unlike owning a mutual fund owning a bond fund is very different than owning the underlying securities.

Hope we see another nice rally tomorrow :)

For example, I have my retirement in stocks, but I also have an emergency fund (in cash), and am accelerating my mortgage payments (real estate).

I’ve seen others make this same mistake: paying down your mortgage is not an investment in real estate. You made your investment in real estate the moment you signed that mortgage. Paying down the mortgage has no effect on your asset allocation, nor does not increase your exposure to the real estate market. It is paying down debt, pure and simple.

“It took 27 years for the stock market to recover after the first great depression. Are you prepared to wait for it to come back?”

This is true, but in all market history, there was only one great depression. After other crashes the market recovered sooner. After 1987, it took only a couple of years if I am not mistaken.

We don’t know if this situation is more like 1929 or 1987. Sure, there was no recession in 1987, and there is one now. But there are differences between now and 1929 as well, specifically the government policies and the cooperation between countries. After the 1929 crash, the government raised the interest rates. Sure, they had kept them too low in the 20s, but after the crash the economy was contracting which brought inflation pressures down, and raising interest rates was not needed and was exactly the wrong thing to do. 2) There was no FDIC, so when over 9000 banks failed throughout the 30s, people lost their money. This is not the case now. 3) As businesses started to fail, the government introduced the tariff that resulted in retaliations that resulted in higher prices that nobody could afford. Today, at least for the moment, the countries cooperate to try to resolve this crisis.

Sure you can say that with all this liquidity we will get inflation and higher prices, but at the moment the slowing economy, unemployment and lower oil prices there are anti-inflationary pressures as well. We may still get it later, but then the government can raise rates.

Additionally, if you believe that we’ll have huge inflation, cash isn’t going to help you either. Gold might, so certainly, if you are 100% sure we’ll have hyperinflation buying gold may be the right thing to do. But a) this may not happen and b) remember, there was Gold Confiscation in the 30s…. Sure not that currency is not backed by gold it’s unlikely, but if the currency becomes worthless, who knows.

Besides, the great depression’s spread to other countries may have indirectly contributed to Hitler’s rise to power in Germany and, hence, the second world war. Given how interconnected the world is now, you may well believe that another such event may lead to pretty bad things. In this case whatever you do is not going to help. So we may as well plan for other scenarios.

So really, if you believe that the world is going to come to an end there is not much you can do other than maybe buy a farm and grow your own food. Thus, it seems to me we should consider other possibilities i.e. that we’ll have a shorter recession and that the economy will grow again.

“It took 27 years for the stock market to recover after the first great depression. Are you prepared to wait for it to come back?”

Yes.

“It took 27 years for the stock market to recover after the first great depression. Are you prepared to wait for it to come back?”

No.

Don’t have that kind of time in my late 40s.

Participating in 1000 point daily volatility is not investing. It’s gambling. You wanna invest? Start a business and make something people want to purchase. That’s investment.

To Kitty:

Germany was already in the midst of its own economic depression in the 1920s before the Depression began in the U.S. Germany’s depression was basically imposed by the harsh conditions of the Treaty of Versailles, which called for Germany to pay reparations for its aggression in World War I. It was more likely life under the harsh economic conditions in Germany in the 1920s that set the stage for Hitler’s rise to power on a platform of restoring Germany to its place of power on the world stage, rather than the U.S. Depression, which occurred later. The world economy is in a very different place now, so we’ll just have to watch and see what happens!

To Allison:
It is indeed true that the Germany was hit hard by the Treaty of Versailles, so the economic situation in Germany in the 20s was not good. However, it was propped up by huge loans from the US in 1924 (under the Dawes plan) and in 1929 (the Young Plan). After the crash in 1929, America needed these loans back to assist American economy. After the crash, America gave Germany 90 days to start to re-pay the money which devastated Germany – between 1929 and 1930 the unemployment doubled. In 1930 – one year after the crash, the Nazis gained a whole lot of seats in parliament – a lot more than expected.

Here are some articles that outline the impact of the great depression on Germany.
http://www.historylearningsite.co.uk/weimar_depression_1929.htm
http://www.historyplace.com/worldwar2/riseofhitler/begins.htm

If you google for the Great Depression + Germany, you’ll find a lot more information that confirm what I said.

Yes, the world is a different place. But given the world government interventions in the current crisis, I don’t believe we are headed for the great depression. If we are than heaven helps us all as some of the emerging markets can be hit badly, and they may not be that stable politically.

And remember: Unless you sell your stocks, you haven’t lost anything at this point – it’s all on paper.

I’ve heard this advice before and I understand it is supposed to help investors cope with volatility. That said, I think it’s a terrible way to invest.

J.D. provides great examples of why it is poor advice in his very next paragraph. Home Grocer went to zero, while Celera Genomics and Triquint Semiconductor are down ~80% from 2000. Investors in Home Grocer lost everything – and it wasn’t just ‘on paper’ – and Celera Genomics and Triquint Semiconductor would have to go up 500% to recover their losses.

Take Lehman Brothers or Washington Mutual as more recent examples… both trading around $0.10. That’s nearly a 100% loss from pre-crisis levels.

You own an asset that dropped in value by $2,000. I’m not sure what is confusing about that.

There is nothing confusing about it, its just not true. Its only an estimate of the value that declined. That estimate is extrapolated from the price that the people who were buying and selling today settled on.

Investors in Home Grocer lost everything – and it wasn’t just ‘on paper’ – and Celera Genomics and Triquint Semiconductor would have to go up 500% to recover their losses.

Take Lehman Brothers or Washington Mutual as more recent examples… both trading around $0.10. That’s nearly a 100% loss from pre-crisis levels.

I don’t think anyone should believe it is inevitable that they will get the opportunity to sell at a higher price than they can today. But until they sell, they haven’t made or lost any money.

In the examples you use the company went out of business. They have no value – their shareholder’s losses have been realized. That is not a market estimate.

But in a market where lots of people want to sell at any price and lots of people don’t want to buy at any price, the market price is going to be low. You can’t really extrapolate a value from that. It just doesn’t tell you anything (or much of anything) about the value of the companies you own shares in. It just tells you how those transactions happened today.

The real estate market is a good example of how unrealized gains and losses don’t translate into money. The market value of a lot of people’s homes doubled or tripled. But to realize those gains, they would have had to sell the house and find another place to live. Which would either cost as much as the one they sold or not be as nice. In essence, the value of their house hadn’t changed at all.

Some people still made a lot of money in real estate and others have lost (and will continue to lose) real money. But for people who owned homes through the bubble and never refinanced, they never really made any money and they aren’t losing it now. Until they realize the change, its just a mind game.

Ross @59: Again, I am struck by your comment. In fact your example is a great mental exercise to counter your argument. The very fact that one can refinance and “extract” more money out of their home without selling is exactly evidence that the value has increased. It is not a “mind game” but real change in value. If the value had not changed, banks would not be willing to lend money beyond the purchase price (illegal bank tricks aside).

Purchase price: $200,000
Loan: $180,000
Equity: $20,000

After two years:
Home value: $250,000
Original loan remaining: $170,000
Equity: $20,000 (down) + $10,000 (payments) + $50,000 (appreciation)

Refinanced loan: $225,000
Equity: $25,000
Cash out: $55,000

How do you explain this if the value did not actually increase? Are you suggesting that the refinance in itself CREATED value? The refinance is only a measure or an evidence of a change in value. A refinance cannot create value.

If no one buys my goods at the market today, does that make them worthless? Of course not. Actual monetary value is determined when something is sold and that value realized, until then we use the market to estimate its likely value. But its a guess extrapolated from a very small sample.

our math with the loan is a red herring. Take out financing altogether and assume that there was no original loan and the individual bought the home out outright prior to the $50,000 appreciation.

Its not a red herring, as your new example again demonstrates. To start with they owned a home. After taking out the loan they won the same home, they owe $50,000 on a loan and they have $50,000 in cash. Again, where is the “money” they made on the house?

The answer, of course, is that there isn’t any. Until they sell the house and realize a profit all they have is an estimate – a guess – about what the house will sell for. And, as many people have recently discovered, that is not the same as money in the bank.

if no one is willing you purchase your goods at the market today at any price, THEN THEY HAVE NO MARKET VALUE.

And presumably neither do the goods you didn’t offer for sale? It seems a bit bizarre to say that the tomatoes the farmer offered for sale, but failed to sell, are worthless. But the tomatoes he left in his storehouse are worth whatever other farmers sold their tomatoes for that same day.

The reality is that the tomatoes’ monetary value isn’t set until they are sold. Until then, you are extrapolating a value. Its just an educated guess about how much they might sell for.

If the investments in your retirement portfolio currently trade at 50% of your purchase price, it’s very dangerous to think that you haven’t lost any ‘money’ because you haven’t realized the losses.

It is equally dangerous to think you have made “money” if you haven’t realized the gains. In both cases, you still own the same stock you bought and until you sell it you haven’t lost or made any money.

If you own Home Grocer stock, there are plenty of reasons other than the market estimate to wonder about how much value it has. When your house burns down you don’t need market comparables to know its worth less than what you paid for it.

Your logic dictates that investors in these companies haven’t lost any money over the past 6 years.

Where is the money they lost? The spent money to buy stock, they still own the stock. Until they sell it they don’t know how much money they have lost. The market is giving them an estimate – but that’s all it is. There are plenty of reason’s to think the current market does not provide a very good estimate.

When you buy 100 shares of stock at $50/share, you lose $5,000 of “money”.

No – I don’t “lose” money at the grocery store. You spend money on stock, but stock is not the same as money in the bank.

Your contention seems rather academic and semantic, thus not very practical.

There is nothing academic about the consequences to people who they had made “money” on their house during the real estate bubble. Many of them spent that “money” on all sorts of things. Now they are discovering that money wasn’t theirs, it was just another loan like charging stuff on a credit card only at a lower interest rate.

The same is true for people who own stock. The consequences of the misconception that you make or lose “money” when the market goes up and down can be seen in the public debate over creating personal investment accounts as an alternative to Social Security. Just talk to someone who is having to cash out their stock for living expenses right now. It doesn’t matter how much the stock was worth a year ago.

Let’s try to break this done once more.

If I purchase a widget for $10, then theoretically the widget and $10 are worth the same.

If a year later I sell the same widget for $15, then theoretically the widget and $15 are worth the same.

The sale did not cause a change in value. The change in value happened over the year in between transactions. The sale is simply evidence of that valuation change.

“But you certainly didn’t make any money until you sold it.”

Ok, I think I finally understand what the problem is here. You are talking literally about dollars. Yes, you don’t make any “money” from gold appreciating 50% because the value is still in gold. But that is kind of a pointless distinction. If today I can buy 3 widgets with my 1 gold bar and tomorrow I can buy 5 widgets with my 1 gold bar, the 1 gold bar has increased in value. Have I made “money”? Well, no, if you are talking about dollar bills, because I have not decided to exchange my 1 gold bar for dollar bills. But I have certainly become more wealthy, (holding the value of a widget constant).

“And how much money you estimated you would receive three months earlier or three months later is irrelevant.”

It is not an estimate! It is a true change in value. I still do not understand the breakdown we’re having here. Does the above example that does not involve dollar bills clear up the point of estimate vs. true current market value??

“What is pointless is saying you made “money” because someone else paid more for a widget than you did. And its even more pointless to say you “lost money” because someone else paid less than that the next day”

We are not talking about one person. We are talking about the market as a whole. We are also talking about a situation where the asset being valued is completely identical to those being bought and sold that day in the market.

This is just about the purest form of market valuation.

Thanks,
-Matt

“Lets be clear, the issue is not whether market estimates have uses. They do. But confusing the values they set with money in the bank is not one of them.”

If you don’t get it by now, I don’t think you’re going to. Money is only a single representation of wealth. It too fluctuates in market value, like any other asset. It does not matter whether your wealth is in dollars, yen, gold, puppies, real estate, or cattle. The same wealth can be held in each asset, and the value of that wealth will change as asset valuations fluctuate with respect to each other. Individual transactions from one asset type to another is evidence, but not proof, of that asset’s true market value. The true market value is an averaging of “buy price” and “sell price” for an arbitrarily defined period for all individuals in the market for that asset.

The counterpoint to your argument is simply this: if you purchase asset A for $x and then tomorrow and forever no one is willing to purchase asset A for $x, then asset A has fallen in true market value. There is no estimation here and it does not matter if you ever sell asset A for less. Your wealth has decreased.

Similarly, if you hold all your wealth in dollars and those dollars fall in value by 50% due to inflation or other means, then your wealth has decreased. You do not have to wait until you exchange those dollars for another asset. You may not “know” the change in value, but that has nothing to do with the fact that there IS a new market value and it is different from the original.

For the benefit of everyone, I will stop trying to explain this to you now.

Ross, your appeal to authority doesn’t make your statements true, no matter how many times you quote Schiller. It’s discouraging to see all of your arguments summed up in quotes he made this past Saturday.

You spend money on stock, but stock is not the same as money in the bank.
Exactly, and this is why – according to your logic – you lost money when you bought stock. When you trade money for stock, you lose an exact amount of money and gain stock. Then, when you sell, you gain or lose money.

1 – Risk Tolerance. Understand your risk tolerance is great, but also understand that conservative investing will lead to conservative results in the long run.

2 – Diversification is good, until you are so diversified where you returns are not making what you want. A few goods ETFs may be your best choice.

Otherwise, look for investment growth in what you invest. Don’t just invest and assume. Also, learn to use market volatility indicators, like the VIX, to get out of you investments.

Both you and Schiller wrote:

Here is my first post on the subject:

“As the Yale economist Robert Shiller has pointed out, stock values aren’t “money”. They are just guesses of the stock’s value based on what a very small group of people who are buying and selling today think the stock is worth at this moment. We extrapolate a value from that.

This is why, unlike money, stock value can just disappear and reappear.”

So if you are claiming some of my ideas come from Shiller, then you are merely restating the obvious since I attributed them to him from the start. So what?

I never claimed that stock values are *always* the same as money.

When do you think they are? And when do you think they aren’t?

It’s not prudent to view unrealized capital gains as increases wealth. However, I think it’s equally imprudent to ignore unrealized capital losses as decreases in wealth.

The reason we call them “unrealized” is because they aren’t “real”. If you have a 20 year horizon for investments and no intention of selling or buying, then the current market estimate has almost no meaning in terms of the price you are likely to get in 20 years. The market price is very likely to go up and down several times between now and then. About the only use a current market estimate has is to rebalance your portfolio.

you to take it a step further and say that the current valuation is the valuation at time of purchase

I didn’t say anything of the sort. You seem to be using “wealth”, “value”, “market valuation”, “current valuation” and “money” as if they are interchangeable. So I have no idea what you are actually talking about.

Let’s take a simple example. If you have a government bond with a maturity of 30 years and hold it for 30 years you know exactly how much money it will produce.

There is also a market in bonds and that bond will sell at different prices during those 30 years. Those prices are irrelevant to someone who is holding it to maturity.

You can’t say they “lost money” just because they can now buy the same bond for less than they paid for it. Or that they “made money” because they can sell it for a higher price. Just like our farmer with his tomatoes, you have to actually sell them to make any money.

“Ross, you have been talking about “money”, not me.”

Here was your original comment that started this exchange:

“Again, I am struck by your comment. In fact your example is a great mental exercise to counter your argument. The very fact that one can refinance and “extract” more money out of their home without selling is exactly evidence that the value has increased. It is not a “mind game” but real change in value.”

A lot of people believed that fallacy and are now paying a heavy price for it because they pledged their home as collateral on a loan they can’t afford to pay back.

That is a different subject. It has nothing to do with people who took out a loan on their house thinking the market estimate of its value was money in the bank.

JD’s article talks about “Investing in a Bear Market.” Considering the events of the last 3 months, perhaps the article is worth revisiting. The Dow fell from its peak of 14,279 on 10/11/2007 to 9,387 on 10/13/08 when JD posted the article. Yesterday (12/24/08), the Dow closed at 8468, down 5,811 points (40%) from its peak. Many GRS readers with long investment time horizons commented that they don’t care too much about market volatility and see the current market climate as an opportunity to buy.

Of course, the market could head lower from here. Is it possible that the stock US market could follow in the footsteps of the Japanese stock market which peaked nearly 20 years ago when their real estate bubble burst? Today the Japanese stock market is mired at just 20% of its peak. What if that was the scenario of the US stock market 20 years from now?

If you could choose between two slightly different investment strategies (Strategy 1 and Strategy 2 below), and you had to live with your choice from now through retirement, which of the following would you choose?

–Both strategies would invest in exactly the same funds.

–From a historical perspective, both strategies returned a compounded annual growth rate between 11%-12% over 35 years through the end of 2007.

–Strategy 1 requires you to simply buy and hold (or dollar cost average into) a pre-determined group of funds. You will do nothing other than to spend about 1 hour per year rebalancing your portfolio. Even though the compounded annual growth rate for Strategy 1 was 11%-12% over the 35 years ending in 2007, the individual yearly returns of Strategy 1 ranged between -12% (worst year) to +27% (best year). The maximum portfolio drawdown from peak-to-trough was 20% measured monthly during that period. However, in 2008, Strategy 1 lost 36% of its total value.

–Strategy 2 requires you to spend about 6.5 hours per year (an average of 30 minutes every 4 weeks) reviewing the performance of the same pre-determined funds used in Strategy 1. Sometimes you will buy or sell individual funds based on signals generated by an unemotional, purely mathematical model. For Strategy 2 the compounded annual growth rate was 11%-12% over the 35 years ending in 2007, but the individual yearly returns of Strategy 2 ranged between +1% (worst year) to +26% (best year). The maximum portfolio drawdown from peak-to-trough was 10%. In 2008, Strategy 2 lost 1% of its total value.

Which strategy would you choose going forward?

Whether you are in a bull or a bear market, pick an investment strategy with risk characteristics that work for you. Follow the strategy without fail.

Paul at http://www.sageinvestmentstrategies.com

Hi Ross,

Thanks for your thoughtful comments. I appreciate your point of view.

In my earlier experiences as a modeler, I sometimes found it an emotional challenge to follow my SISTM (Sage Investment Strategies Timing Model) without question. Sometimes the model would tell me to do one thing while my emotions tugged at me to do something else which might have seemed more logical at the time. Whenever I allowed my emotions to get the best of me and did not follow one of the signals, the SISTM almost always proved to be right.

Over time I gained complete confidence in my SISTM and disciplined myself to follow its signals. That confidence and self-discipline kept me out of trouble in 2008. I’m 60 years old and can’t afford to lose a big chunk of my portfolio as I did during the 2000-2003 bear market before becoming a modeler. I designed my SISTM to optimize both nominal and risk-adjusted returns. I measure standard deviation, Sharpe Ratio and peak-to-trough drawdown and compare them with key benchmarks as well as a buy-and-hold portfolio.

Looking back at 2008, one of the most the most difficult and tumultuous periods in financial markets in the last 80 years, I’m very pleased with the performance of my SISTM. From 2007 onward, I invested 100% of my own, my wife’s and my mother’s money using the “buy” and “sell” signals that my SISTM generated. The results which I update weekly on my website speak for themselves.

Paul
http://www.sageinvestmentstrategies.com