Every bull market produces its fair share of investment myths and financial fads.

During the "Roaring" 1920's, buying equities with high levels of margin debt was the norm among everyday investors. In the mega bull market from 1982 - 2000, it was the notion of buying and holding index funds at all times that became the cornerstone strategy for many institutional and small investors alike.

There is one problem: both strategies led investors off a financial cliff! Winans International completed a study that compared three different investment strategies using S&P 500 Index funds from December 1987 through 2008. Two different scenarios were analyzed. One where all capital was invested at once (i.e., beginning lump sum investment), and the other was building up a portfolio gradually by investing $500 per month through dollar cost averaging.

As the table shows, the buy and hold strategy dramatically under performed portfolios where exposure to the stock market was adjusted with time-tested technical indicators such as the 200-day moving average or the January Barometer.

Passive vs. Active Indexing Strategies 1988-2008:

Year Buy & Hold  Buy & Sell
200 Day Moving Average January Buy & Sell Barometer 
BLS DCA BLS DCA BLS DCA
1988 10% 3% 3% 1% 10% 3%
1990 23% 5% 7% (3%) 33% 12%
1992 58% 26% 27% 12% 63% 29%
1994 60% 22% 24% 6% 65% 24%
1996 146% 79% 95% 60% 152% 87%
1998 274% 159% 167% 105% 282% 149%
2000 263% 142% 197% 105% 328% 173%
2002 130% 49% 189% 90% 249% 113%
2004 201% 94% 245% 128% 266% 110%
2006 227% 111% 269% 143% 287% 123%
2008 92% 25% 263% 140% 256% 106%
Annualized Returns % 4% 1% 13% 7% 12% 5%

*Cumulative % Returns with a Beginning Lump Sum (BLS) or Dollar Costs Averaging (DCA) in S&P 500 Index funds.

While buying and holding S&P 500 Index funds worked very well during the great bull market run of the 1990's, they quickly gave up their gains during the two significant stock market declines that followed. In other words, these passively managed index portfolios went through a 21-year roller coaster ride.

The buy and hold strategy for this period produced terrible returns. Not only did it under perform the simple, yet effective strategies of the 200-day moving average and the January Barometer, but it also under performed buying and holding 90-day T-bills (annualized results of 4% and 1% versus 5%).

It was a different story for portfolios that switched current portfolio holdings and new contributions from equities to 90-day T-bills during the 10 times when the S&P 500 Index traded below its 200-day moving average for at least a month, or the five separate occasions when the index posted negative results in January. The portfolios that used these time-tested tools (which are widely available through major publications and free websites) posted solid annualized returns during market advances and protected portfolios during bear markets.

"Since 1850, the U.S. equity markets have posted negative returns 28% of the time. This historical fact means that a successful investment strategy must incorporate a policy for reducing investment risks during bear markets," says Ken Winans, author of Investment Atlas.

Throughout history, Wall Street has invented investment products that go off track when bull markets end, and it is fair to say that the idea of 100% invested, 100% of the time will end up in the ash heap of flawed financial logic. In sporting events and military operations, overall victory only comes from executing a good offense AND an effective defense. The same is true of investing.

More information on the Winans International Investment Management & Research can be found at http://www.winansintl.com/ & http://www.investmentatlas.com/




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