Buy and Hold is NOT the Best Strategy

<p>
<h1>Buy and Hold is NOT the Best Strategy</h1>

</p>


<p>
I have heard many people say that the best strategy is to buy and hold.  You can't time the market, just keep putting your 

money in every month into index funds, and you will eventually save money... Blah, blah, blah.  I'm sorry if you are one of 

these people.  Using some quick analysis, you can easily beat the market, hands down, and only execute a dozen trades per 

decade!  
</p>

<p>
First, let me show you how buy and hold can screw you.  I present to you, JAPAN!
</p>

<img src="http://www.lizak.ca/images/charts/bear/Nikkei.40000.gif">

<p>
If you had bought the japanese Nikkei index in 1989, you'd still be waiting to break even.  This is the most well known 

counter example to the 'buy and hold' theory.  The high was almost 39,000 on the index, today it's at around 13,000 give or 

take.  So, if you bought and held, you lost 2/3rds or 66% of your money.  "But Peter!" you say.  We're not Japan!  OK - so 

I took the most extreme example, but I wanted to make a point.
</p>

<img src="http://www.lizak.ca/images/charts/bear/spx.gif">
<p>
Above is the S&P 500 index.  Notice that if you bought it in 2000, you barely broke even at the peak of 2007, and today 

would still be in a losing position.  Now notice the green and purple lines on the chart as well.  The Purple line is the 

20 week moving average, or 20wma for short.  The green line is the 50 week moving average, or 50wma for short.  Being 

'averages' of the S&P 500 they smooth out the chart, and make it less jagged or rough.  Let's take a closer look at them.
</p>

<img src="http://www.lizak.ca/images/charts/bear/SPX.20wma_VS_50wma.gif">

<p>
In the chart above of the S&P 500 I've added some arrows.  These are points were you trade.  That's it.  Four trades in 

over a decade.  Not very exciting, most anyone can follow along at home.  Here's how it goes, and the basic rules for long 

term trading.  
<ul>
<li><b>BUY SIGNAL</b>  When the 20wma > 50wma (The purple line is above the green line), buy SPY, the S&P 500 index ETF
<li><b>SELL SIGNAL</b>  When the 20wma < 50wma (The purple line is below the green line), buy SH, the S&P 500 index inverse 

ETF
<li><b>TRADE SIGNAL</b>  Only switch from SPY to SH (or SH to SPY) when the difference is greater than 1% to prevent 

excessive flip flopping.
</ul> 
The only times the third rule comes into play is in 2004 in the light blue circle area.  That's it.  It almost came into 

play in 1998 in the Beige circle area, but the lines did not cross (although they came close!). </p>

<p>For those curious to what SPY and SH are, check out the Yahoo pages for them.  SPY (pronounced "SPIDERS") is a fund that 

mimics the S&P 500, it currently has a dividend of 2.1% (<a 

href="http://finance.yahoo.com/q?s=spy">http://finance.yahoo.com/q?s=spy</a>).   SH is like the opposite of SPY, it mimics 

the inverse of the S&P 500, that is, if the S&P 500 goes down 1%, then SH goes up 1%.  Great for when the stock markets are 

in a downtrend!  It also pays a dividend of currently 3.2% (<a 

href="http://finance.yahoo.com/q?s=SH">http://finance.yahoo.com/q?s=SH</a>).   So even if you like dividend plays, both 

provide dividends!


</p>

<p>
How would this have done on an investment strategy?  Let's assume a round number of $100,000 invested in 94 when the 'buy 

signal' formed as the 20wma went above the 50wma by more than 1%.  
<ul>
<li>The cross occured in November of 1994.  The S&P 500 was at 461 pts, so 1% is rougly 4 1/2 points.  However, the cross 

was not larger than 1% until February 24th, 1995, when the S&P 500 was at 488.  So, with the strategy above, we would have 

bough SPY (gone long the S&P 500) at 488 S&P points.

<li>The next cross occured in November of 2000.  The S&P 500 was at 1,435, so 1% is roughly 14 points.  However, the cross 

was not larger than 1% until the week of february 22nd, when the S&P 500 was at 1,357.  So, with the strategy, we would 

have sold the S&P 500 at 1,357 points.

<li>The third crossing occured in June 2003 at 892, so 1% is rougly 9 points.  The crossover of the 20wma and 50wmamoved 

quickly this time, and by the week of June 27th, the 20wma > 50wma by more than 9% (or 1%).  Hence, selling the SH and 

buying SPY at 976 points.

<li>The last cross occured in January of 2008 at a value of 1,476 points, 1% of which is roughly 15 points.  The averages 

crossed by more than 1% on the week of February 8th, 2008, with the S&P 500 at 1,331 points.  So we would have sold our SPY 

shares, and bought the SH shares.
</ul>

Now how much would we have made?  
<ul>
<li>Buying at 488 points in 1995, Selling at 1,357 points in 2000.  This gives us (1,357-488) = 869 points, or a return of 

78% in 5 years.

<li>Now by buying SH in 2000 and selling in 2003, we're making money as the S&P goes down.  So we bought it at 1,357 and 

sold it at 892.  So we made (1,357-892) = 465 points, or a return of 34% in about 3 years.

<li>Now we buy the SPY again in 2003, and sell in 2008 at 892 and 1,331 respectively.  (1,331-982) = 349 or about 36% in 4 

1/2 years.

<li>Now we sell the SPY in 2008 and buy SH as of January 2008.  We would have sold at 1,331 and the S&P 500 is currently at 

around 1,330, we'll call that breaking even for now.
</ul>

Tally up the returns, we made 78%, then we made 34%, then we made 36%.  Assuming we started with a round $100,000, we'd 

have</br>
100,000 x 78% = 78,000 return, for a total of (100,000 + 78,000) = 178,000 in February 2001.
<br>
178,000 x 34% = 60,520 return, for a total of (178,000 + 60,520) = 238,000 in June of 2003. 
<br>
238,000 x 36% = 85,867 return, for a total of (238,000 + 85,867) = 324,000 in February of 2008.
<br>
That's a total return of 324% in 14 years.  That's an average of 8.8%/year.  Plus, you get either a 3.2% dividend or 2.1% 

dividend depending if you are holding SH or SPY.  So the total return is closer to 11%/year on average!
</p>

<p>
The return on the S&P 500 from 94 to 2008 is (1,330 - 461) / 461 = 188% or a little over 4.5%/year.  If you include the 

dividend coupons of about 2.1% on the S&P 500, you're getting around 6.6%/year.  The extra money you make by making a few 

adjustments every few years means over the long term you can grow your investments a lot quicker, and safer!  By doing 

this, you can get an average increase of (11% - 6.6%) = 4.4% return!  
</P>

<p>
What if I only invest in Canadian companies?  Good question.  The TSX is the index for Canadian stocks, and if you are 

Canadian, investing in the TSX makes more sense as you do not have currency risk to worry about.  
</p>

<img src="http://www.lizak.ca/images/charts/bear/tsx.20wma_VS_50wma.gif">

<p>
Above is the TSX index from 1994 to present as well.  Notice that the TSX has a few more turning points than the S&P 500.  

There was a blip in 1998 that would have caused you to trade twice in one year, but other than that, the same idea applies 

as to the S&P 500.  I will update shortly with when the flips would have occured and what return you would get by following 

my simple 20wma vs 50wma trading strategy over a simple "buy and hold" strategy.
</p>

<p>
I hope this reading was informative and makes you consider buying inverse funds when the market is in a down trend.  Some 

people do not feel comfortable, in which case, I would recommend TBills when the market shows that the 20wma is less than 

the 50wma.  Different styles for different people.  Remember that Cash, or Tbills is an invest option as well.  It allows
you to prevent losing your money.  Since both the S&P 500 and the TSX index have both shown a <b>SELL SIGNAL</b>, I hope you all are extra cautious in the near term!  As always, if you have any questions, feel free to email me.
</p>

<p>Cheers,<br>Peter</p>