I have a 20+ year time horizon and I wanted to try something more “exciting” than buy and hold. When the market is dropping, I’d buy stocks at intervals of 5% declines from the most recent peak. When it is rising, I’d sell at intervals of 10% gains from the most recent low. I was thinking of using the DOW as my benchmark.
What you’ve described is more of a trading strategy. This formula scares us, especially in the market environment we have now.
First, we do not believe you can time the market. There are approximately 250 trading days each year, and the market is up 66% of the time. You never really know if you are at a peak or a trough until it is over. The market can also move very fast. If you happened to be out of the Dow during the 10 best trading days during the 109-year period (1899-2008), you would have lost two-thirds of your cumulative gains.
Let’s say you’re starting with $100,000 in cash. Cash is yielding close to 0%. If you are only buying stocks at a 5% decline, may have had an opportunity to buy once in the last five years. If your $100,000 was invested, you would have been selling a portion of your portfolio at every 10% gain for the last four years. You would be left with capital gains and a significant amount of trading costs. If you sold out completely after a 10% gain, you would have been sitting in cash for several years.
If you are a perpetual saver, we don’t mind if you have a “Vegas Account” where you set aside 5% to 10% of your total portfolio to play these market games and have fun—chase the high flyers; hold it in cash for the next downturn to buy stocks on the cheap. If by the end of the year you haven’t lost it all, then you can go to Las Vegas. We believe 90% of your financial future should be in high quality stocks that follow an investment strategy based on fundamentals like valuation, financial strength and earnings growth.
At Henssler Financial we believe you should Live Ready by having a sound investment discipline that you stick with. If you have questions our experts are here to help: