Investments
After years of volatile and sometimes fiercely downward markets, we believe a philosophy different from the conventional approach is required to produce meaningful investment results. The fad of the “gunslinger” led to heavy losses in 1969-1970, just as the fad of the “one decision” stock produced enormous losses in 1973-1974 as did the popping of the NASDAQ / Tech bubble in 2000. Since 1975, the performance results of many professional investment advisers and mutual funds have consistently trailed those of the broad market averages. To cope with such failures, the fad of “index funds” was developed, but indexing is actually an admission of defeat by money managers. They cannot do the job so they resign themselves to mirroring the action of the averages. In a difficult market, like 2000, indexing means accepting a loss with equanimity. DRT does not believe that approach is sensible, desirable, or necessary. Every time investors lose money in a down market, they lose valuable time. Since 1929, there have been 13 bear markets based on the S&P 500 index. If you analyze the years spent going through a bear market and then returning to break-even, you find that investors were actually making money only one-third of the time. The rest of those years were spent sitting out bear markets and the subsequent return to break-even. The stock market has historically outperformed virtually all other investments, but at the cost of subjecting investors to greater volatility. Between 1929 and 1997 there have been 13 bear markets, defined as those periods when the S&P 500 has fallen at least 20%. The average bear market slashed almost 39% from stock prices. Omit the '29 crash, when values declined 87%, and the result is still an average loss of 33%.     S&P 500 Index Bear Market Study(9/29 - 12/00) Bear Market Duration (Months) Decline% Years to Breakeven Sept 29 - June 32 33 86.7 25.2 Years July 33 - Mar 36 20 33.9 2.3 Years Mar 37 - Mar 38 12 54.5 8.8 Years Nov 38 - April 42 41 45.8 6.4 Years May 46 -Mar 48 22 28.1 4.1 Years Aug 56 - Oct 57 14 21.6 2.1 Years Dec 61 - June 62 6 28.0 1.8 Years Feb 66 - Oct 66 8 22.2 1.4 Years Nov 68 - May 70 18 36.1 3.3 Years Jan 73 - Oct 74 21 48.2 7.6 Years Nov 80 - Aug 82 21 27.1 2.1 Years Aug 87 - Dec 87 4 33.5 1.9 Years July 90 - Oct 90 3 19.9 0.6 Years
During that 68-year period, a new bear market began on the average every five years, with an average duration of 17 months. After the bear market bottomed, omitting the distortion of the 1929 crash, it took an average of 3.5 years just to return to a breakeven position. Every time investors lose money in a down market, they lose valuable time. If an average bear market reduces the value of your portfolio by 25%, you need a 33% return to return to breakeven. After eliminating overlapping bear markets, 41 years were spent either suffering through a bear market or returning to breakeven. In other words, investors spent 2/3 of their time just trying to stay even. Only 1/3 of the times were they benefiting from the stock market's ability to make their investments grow in value. Many individuals and institutions have chosen to forego the superior performance of the stock market because they are unable or afraid to invest solely for the long term or take the risk of sudden short-term losses. For these investors, market timing offers the opportunity to participate in the market with the goal of reducing risk and increasing risk-adjusted returns . When risk is figured into their returns, studies have shown that timers consistently outperform the market. According to a study published in the Journal of Portfolio Managementin the summer of 1992, 92% of the 25 timers tracked by MoniResearch Newsletter outperformed the market averages in the 1987 collapse, as did 96% during drops in January 1990 and August 1992. Another study shows that market timers can miss up to 20% of the bull market’s rise and participate in 20% of the bear market decline, and still equal the performance of a buy-and-hold investor. Most traders of the last decade have not seen a bear market, our team members at DRT are seasoned veterans in bear markets .
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