Lockey News

Market Truth: Buy and Hold, During the Right Time, Can be a Good Strategy More important than "buy and hold" is that when you decide to buy and hold. For the investor who started a "buy and hold" strategy in 1982 and then decided they were getting off the investment train in the year 2000, that was a good strategy . . . a great strategy in fact. For the investor who started out on his or her investment journey in the year 2000, by the end of 2002, Mr. Jones saw a loss of about 35% of his investment capital right off the bat. That is going to take a rally of about 55% to get back to even.

Looking at this table below, let's say that Mr. Jones was getting on the investment train in 1966, for 199 months he saw his account go no where and actually lose money with a buy and hold strategy. Let's just say that for those 199 months, over 16.5 years, Mr. Jones doesn't actually lose any money but he doesn't make any ground either. If he starts out with $1,000,000, after sixteen years of withdrawing just 3% a year, his portfolio has dropped to $614,253. If you have clients that have over 300 months (a strong and a weak cycle) before they even want to think about needing the money, then maybe buy and hold will work for them. What's more important, however, is that Mr. Jones doesn't lose faith in his buy and hold strategy just as the market comes out of a weak cycle. As we know though, psychologically, that is when investors usually throw in the towel.

(Information below courtesy of www.rydexfundsfp.com.)

Strong Cycles:

Weak Cycles:

Market Misconception: Falling Interest Rates Help the Stock Market Market Truth: There is No Long Term Correlation Between Rates and Stock Market Prices

One example that comes distinctly to mind is the Japanese market. That market has been in a 20-year bear market while rates continued to fall and fall and fall, yet the stock market could not make any headway. Taking a look closer to home, here are just some recent examples of rate movements and the stock market. In the last eight years we can see that one of the four periods, outlined below, has resulted in falling interest rates while a rising market was in place.

I am a Certified Investment Management Analyst (CIMA), and I cannot see the correlation between interest rates and the stock markets' result.

Market Misconception: Good Earnings Drive Stock Prices Market Truth: Supply and Demand is What Drives Stock Prices In a recent issue of USA Today, there was an article entitled "Profits Might Not Drive Stocks Higher," by Adam Shell. In this article, Shell cites a study done by Ned Davis research that finds "when the Standard & Poor's 500 companies post year-over-year quarterly profit growth of 20% or more, puny gains tend to follow. Since 1927, the S&P 500 has posted annualized returns of 1.3% when the earnings are rising 20% or more." Interestingly enough, this study found "the best time for stocks is when profits are shrinking 10% to 25%. The annualized gains are then: 28.6%." One of the best economic indicators is the stock market. The stock market looks ahead, not behind. Earnings numbers look at what has happened, not what is going to happen. A classic example of this is the NYSE Bullish Percent in 1989 to 1990. In 1989 the NYSE Bullish Percent was above 70%. Then, over the course of the next year, the NYSE Bullish Percent fell to below 30%, into the teens. Finally at the bottom in November 1990 as the NYSE Bullish Percent was reversing back up into X's and putting the offensive team on the field, Greenspan announced that the economy was in a recession. In actuality, what happened was the economy, or the stock market, was beginning to experience problems in 1989 and in late 1990 was finally beginning to turn the corner toward positive territory. At the same time the economic data was looking at what had already happened. One set of tools act as your headlights, the other is more of a rear-view mirror. We prefer to use our "headlights" when "driving" your portfolio forward.

In the end, what moves stock prices is the irrefutable law of supply and demand. The same forces that change the price of produce in the supermarket change the prices on Wall Street. Simply said, when there are more buyers than sellers willing to sell, prices will rise. When there are more sellers than buyers willing to buy, prices will fall. There is nothing else. Please contact us for our latest guidance regarding your portfolio and how we believe the markets will affect you in the future.