Buy and hold, or be active?

Historically, the beginning of October is relatively strong for stocks but can we trust the seasonality data after getting such big performances from August and September this year, which are generally weak months? 

We are also still dealing with all of the new high on the Dow hype and that may have gotten the attention of Joe Sixpack as he read his Sunday paper this weekend.  That could mean that we see a little emotional money buying this morning, but I'm afraid Joe Sixpack may be buying near a short-term top.  In the long run it should work out for Joe, but once again he will wonder why the market drops as soon as he buys.

I won't get too much into this today as I have bored you for some time now on this theory.  Bottom line I am again waiting on a better buying opportunity as the market seems to be quite stretched and due for a rest.

What I wanted to talk about today is the discussion that we have seen between buy and hold investing and more active trading.  You may or may not have heard Mike Causey's interview with the TSP director Gary Amelio.  I talked about it last week but basically they vehemently put down the strategy of trying to time the market and your TSP account.  You can hear that interview here.

Well, Mr. Causey gave equal time to the active traders and actually posted an email sent to him by one of our members.  You can read that article here.  I'm sure we did not convince him but maybe we won over some of his readers.

For the record, I am not against buy-and-hold as an investing style.  Far from it.  The key is to determine what type of investor you want to be and be consistent.  I think the L-funds are a great investment vehicle and I believe it is the best choice for most TSP participants.  That's right - I do.  That is because most people don't have any interest in following the gyrations of the stock market.  Buy-and-holders will do well in the long run, particularly TSP investors who put regular contributions into their account.  Dollar cost averaging is a power tool for the long-term investor.  For these type of investors, I keep a "suggested" long-term allocation on the site.  I only adjust this allocation once or twice per year and it will do rather well if the market moves up steadily. 

But the risk the buy-and-hold investor takes is when the market drops for any prolonged period of time.  Did you know that the Nasdaq lost 78% of its value between early 2000 and late 2002and is still 56% away from that high?  In other words it would have to go up 127% from where it is now to get to where it was almost seven years ago.  The S&P 500 wasn't hurt quite as bad but it is still 14% below it's 2000 high. 

I always considered myself an aggressive investor but as my account began to grow, I started to seriously consider capital preservation as an important part of being a successful investor.  While I still want to be in stocks for the long-term, I felt side-stepping big losses was going to impact my balance as much as being in stocks when they go high. 

Of course all of that is easier said than done, but that is the main mission of this site.  I want to educate those who may not be aware of the options they have.  I want people to know they have choices and they can make decisions based on current probabilities and situations.  We follow indicators that tell us what approach will might work best in a given situation.  Just like a good poker, you don't want to play every hand that is dealt to you.  You have to fold once in a while and wait for a better hand before risking all of your money.  And if you have a straight or a flush draw, make sure you are getting the correct odds before calling.  That's what we do here.  You won't always make your straight, but you will have done the right thing odds-wise.

During the past 3 years the stock market has performed pretty well, nothing fantastic, and the buy-and-hold strategy has also done well, not being in much danger during that time.  We haven't had a 10% pullback in over three years.  That's rare.  The strategy I am talking about will benefit you most when the market is down big, or up big. 

Mike Causey and Gary Amelio would like you to believe that if you are active in your account you WILL lose money.  They actually say that.  We have members on our message board that have doubled the return of the S&P 500 this year and they have been very active with their accounts.  The return of our own TSP Timing Newsletter allocation, written by a professional trader and hedge fund manger, is beating all of the TSP funds since it started - including all of the L-funds. 

So don't let the talk scare you.  Managing your own money can be rewarding and it will be educational.  It takes work to beat the averages, something that the buy-and-hold strategy does not require, but it can pay off.  Plus, the next time your co-workers bring up the Thrift Savings Plan, you can tell them that you are preserving your capital until the intermediate-term overbought/oversold indicator pulls backs, the OEX put/call ratio moves higher, and the S&P 500 moves to the lower end of its trading channel.  You may get some interesting looks.

That's all for today. Currently 100% G fund and waiting for a better buying opportunity.  Thanks for reading. 
 

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RevShark's TSP Timing Newsletter is now available.  You can go to www.tsptalk.com/members1 to sign up.  TSP Timing is a weekly newsletter giving subscribers a target allocation determined by professional hedge fund manager James 'RevShark' DePorre.   Subscribers will navigate the financial seas along side the Rev while he manages millions of dollars for private investors.  Each week he will highlight TSP funds and a target allocation he believes will provide the best investment potential. The newsletters will go over charts of each fund with a technical breakdown of each by RevShark.  The subscription includes midweek updates as needed.

Now you will also have access to RevShark's Around the Reef End of Day market commentary, which is updated daily.

The subscription price will be $19.95/month which will include 4 to 5 weekly newsletters each month, plus midweek updates as needed, and the daily Around the Reef market commentary. 

Still have questions about the TSP Timing Newsletter?  Click here.