I don’t know why I’ve been so hard-headed. I don’t know why I’ve wanted to fight the truth.
Maybe it’s because the truth seems too simple – too good to be true.
Maybe it’s because I enjoy the challenge of trying to predict when the wind will change direction. But that’s a fool’s game, particularly after you learn what I’ll share with you today.
Here’s the truth: The stock market trends… It goes up. It goes down. And history shows you’d have beaten the market – with dramatically less risk – simply by sticking with the existing trend.[ad#Google Adsense 336×280-IA]Sounds crazy, I know. I didn’t want to believe it myself at first. It’s not what I learned in school. But it’s true. And it works. I’ll show you how today.
Simply own stocks when they’re going up. Get out when they’re going down. Doing that has beaten the market… with less risk.
It’s hard to believe this incredibly “dumb” strategy could perform so well, especially when just about any other strategy sounds more intelligent.
But take a look at this chart… It follows a simple system that I’ll explain in a minute. In short, you want to own stocks when it’s green. And you want to stand aside when it’s red.
And it’s not just limited to the past 15 years…
Here are the results of this same system from 1973 through 2008, from an academic paper by my friend Mebane Faber. This simple system (called “Timing” in Meb’s table below) has delivered higher returns and, more importantly, much lower volatility. That’s the Holy Grail for investors:
So Meb’s paper shows it’s worked since the early 1970s… But what if we go further back?
The results are roughly the same, going all the way back to 1900… higher returns… with dramatically less volatility. Here are the system’s returns from 1900 to 2008 (again from Meb’s paper):
The system is so “dumb,” you won’t believe it.
You own stocks when the S&P 500 index is above its 10-month moving average. You sell when it’s below it… and move to cash (short-term Treasurys). There’s nothing magic about the 10-month average, by the way. You can use the eight-month, nine-month, 11-month… whatever. You’re just looking for the trend.
(It’s easy to calculate any of these, too. To get the 10-month average, add up the last 10 monthly closing prices of the S&P 500 and divide by 10.)
Academics want to find more complicated relationships than this one.
Me? I just want what works for you – my reader. For our True Wealth Systems service, we have tested just about every academic system under the sun, from the super-simple to the extremely complicated.
It’s hard to believe, but this “dumb” system actually beats most systems. It beats the markets over most long-term time frames, with much less risk. And that makes it a Holy Grail system… simple or not.
I admit it. I’m guilty of trying to outsmart this little system… I’m guilty of jumping the gun, and jumping in before this system says to buy. Most of the time, this dumb system has been right… and my more brilliant reason for fighting it was brilliantly wrong.
I hope you can learn this investing lesson quicker than I did. It’s taken me years to get this simple idea through my thick skull. I’ve tried to outsmart it for years, and it’s done me no good…
Right now, this dumb system says stand aside. I promise I will let you know here in DailyWealth when it changes its tune…
But for now, the trend is down. Don’t fight it.
— Steve Sjuggerud[ad#jack p.s.]
Source: Daily Wealth