If you are like the majority of investors, you find it very difficult to consistently select winning investments. Research has shown that there are nine major reasons why investors make costly mistakes:
1.
Failure to develop a sound strategy.
2.Bearing either too much or too little risk.
3.Poor investment selection.
4.Poor timing.
5.Inadequate diversification.
6.Poor advisors.
7.Paying excessive taxes.
8.High transaction costs.
9.Failure to control emotions.
Note that most of the reasons relate directly or indirectly to reason #1 -- failure to develop a sound strategy -- and that the inability to control emotions (reason #9) results in much unnecessary stress and great losses for many investors. In short, you must manage your emotions ... or they will manage you.
Much has been written on these investor mistakes; for example, an article entitled "The Psychology Behind Common Investor Mistakes" in the April 2000 issue of the American Association of Individual Investors (AAII) journal reviews the emotional pitfalls that all investors face ... and how these emotions result in irrational investor behavior.
The fact is that the typical investor does not possess the knowledge, time, or desire to undertake the research required to develop a robust strategy ... a strategy that can be followed in all market conditions and thus enable you to avoid costly mistakes. So what can you do ?
The approach that we advocate is to follow an objective, mechanical trading plan, which leaves no room for investor emotions to interfere. We realize that this is no small feat ... the trading plan must enable you to manage risk as well as your emotions.
To do this, it must be consistent with your objectives, be based on sound logic and perform reasonably well in ALL market conditions -- not just favorable market conditions, otherwise you will abandon the plan just when you need it the most.
The requirement to have a workable strategy applies to "buy & hold" (sometimes referred to as "buy & pray") investors, as well as so called "market timers", who attempt to be invested only in favorable market conditions.
In fact, the emotional stress of buy & hold investors, at the bottom of a true bear market, would be impossible to cope with for all but the most committed investors (note that the 13 bear markets since 1929 shaved an average of 39% off the S&P 500 over 18 months - not the one or two day 10% "buy the dip corrections" that many have been accustomed to in the 1990's).
For most people, the "buy & hold" strategy becomes a timing system with the rules:
1) Buy when you have the money to invest;
2) Sell when you can no longer emotionally cope watching your paper profits turn into losses.
Here is the way selling usually happens. You have a good job that pays $75,000 per year, you work hard for years, save, and invest until you have a mutual fund portfolio of $300,000. At some point in time the market takes a 5% tumble and you notice in your last statement that your investments are down $15,000. You've lost $15K, but you know that temporary paper losses are part of the game so you don't worry about it.
After a few more months you see that the market is down 30%-- a serious market correction, your next statement shows that you have now lost $90,000, more than you make in one year. (Remember, there have been 13 bear markets since 1929 and the average decline was 39%) You know that you should stay in, but the thought of losing more money is almost too much for anyone to handle, so you sell, and don't get back into the market until it is well on it's way to new highs.
In the real world, there are exceptionally few individuals who are truly buy and hold investors.
The Case for Market Timing
Imagine investing in a stock market that loses 45% of its value in a 2 year period and doesn't recoup the loss for 8 long years. Sounds like something that might happen in a volatile emerging market - say China or perhaps Mexico?
THINK AGAIN. That's exactly what happened to investors who bet their life savings on U.S. equities in the 1973-74 bear market. Some say that we are overdue for a bear market of this magnitude -- why take the chance if you don't have to?
The purpose of market timing is to provide investors with the opportunity to preserve capital by avoiding major market price declines. Most market timers do not claim to forecast market highs and lows, rather they identify when markets have started declining or started rising.
Use of market timing allows you to be in the market while it is raising and out when it is experiencing significant declines. During long bull runs such as that which happened during the 1990's, market timing systems are unlikely to out perform market averages, but they can come close, and they do it with much less risk.
Market timing is even more beneficial when the markets are experiencing dramatic corrections by exiting before most of the declines occur, you can avoid major losses, and re-invest in the market when conditions improve.
The problem with almost every market timing system is that it requires 100% moves in and out of the market. But no market timing system (and I repeat no market timing system) is 100% accurate.
When your market timing system fails -- and it will -- it fails in a big way, because it placed all it bets on one spin of the wheel.
The MultiStrategy appraoch combines the best aspects of Buy & Hold and Market Timing into a Tactical Asset Allocation System. It performs like a Buy & Hold strategy during bull markets, and protects your account during a bear market like a market timing strategy
Given that any particular market timing system will simply not perform equally well in all market conditions, where does that leave you? Enter the Index Asset Commitment Model (IACM). The IACM uses a portfolio of 5 proven, top performing timing systems to provide you with the best aspects of the Buy & Hold and Market Timing approaches ... it is an extremely powerful Tactical Asset Allocation System.
It performs like a Buy & Hold strategy during bull markets, and protects your account during bear markets -- like a market timing strategy. Click here for more details:
