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  'Buy and Hold' Strategy Tough to Beat


By Jane Bryant Quinn
Tuesday, May 4, 1999

NEW YORK – "Don't try to buy at the bottom and sell at the top. That's only done by liars."

So said fabled Wall Street statesman Bernard Baruch, and it's as true today as ever.

Tens of thousands of investors follow market-timing systems, intended to get them into the market when stock prices are going up, and out again before stocks go down.

Sometimes people invent a system of their own. More often, they follow a newsletter writer or Internet guru. The gurus publish their best predictions, to "prove" how right they've been. (You rarely hear about the forecasts that were wrong.)

In theory, market timers ought to be out of business, after 16 years of the longest bull run in America's history. The mantra for most stock investors is "buy and hold."

Piles of historical data show that most market timers can't beat a strategy of buy and hold. Over the long run, you're better off holding an index mutual fund. Index funds follow the market as a whole. You earn what the market does, minus expenses.

But will you actually buy and hold? Probably not, says Mark Hulbert, editor of the Hulbert Financial Digest, which tracks the performance of investment newsletters.

In the next real bear market, he thinks you're likely to ride stocks down, panic when market conditions turn out to be worse than you expected, sell at the bottom and miss the next big bounce up.

"How useful is it to tell investors to buy and hold when they're unlikely to do so?" he asks.

On the other hand, how useful is it to recommend market timing, to investors who might not follow the timer's every call? And especially when you can't tell in advance whether your timer will get it right?

Alok Kumar of the Yale School of Management in New Haven studied the performance of the market-timing letters in Hulbert's database. He found that most of them fell into one of two categories.

Some are momentum players. They allocate more money to stocks as the market rises and sell stocks as the market drops. Others are contrarians. They allocate less money to stocks as the market rises and buy again when prices fall.

Investors squabble over which approach is best, but guess what? Kumar found that, on average, momentum players and contrarians perform the same-even in a bull market, where you'd expect the momentum game to shine.

Hulbert recently tallied 15-year performance data for 26 market-timing letters (the remaining 269 on his list haven't been around that long).

He compared them with the Wilshire 5000 index, which represents most of the U.S. market, and published his results in the Journal of the American Association of Individual Investors.

The envelope, please:

The Wilshire yielded an average annual return of 16.7 percent, with dividends reinvested. Only two of the timers exceeded that return: The Prudent Speculator, up 23.4 percent (949-497-7657); and Systems and Forecasts/Time Trend (Timing Model: 100 Percent Cash On Sells)—up 18 percent (516-829-6444).

But Systems and Forecasts averaged 17 switches per year. That will cost you a lot of taxes on your capital gains, if you trade a taxable account. It may be more trading than you want, even in your tax-deferred accounts.

The Prudent Speculator borrows heavily to invest, and lost around 50 percent in each of the past three market downturns. Do you have the stomach for that?

True believers in market timing say that beating the market isn't important, what's important is reducing your risk. Good timing strategies lower your risk, because you're not in stocks all the time. Part of the time, you're in Treasury bills.

So how do the timers do, adjusted for the amount of risk they take? The next envelope, please:

Only two of the 26 timers decisively beat the Wilshire 5000:

Market Logic/Seasonality Timing System (800-442-9000; 31.5 switches annually), and Systems and Forecasts.

Three others did modestly better, and averaged just a few transactions a year: The Chartist/Actual Cash Account (562-596-2385);

Peter Dag Portfolio Strategy and Management/Vanguard No-Load Mutual Fund Portfolio (800-886-5075); and Fabian Premium Investment Resource/Domestic Fund Composite (800-950-8765). The Prudent Speculator missed the mark.

For more on market letters, a one-year subscription to Hulbert Financial Digest costs $59 (703-750-9060 or Buy and hold works better. But what works best is any strategy you have the discipline to pursue.

Jane Bryant Quinn welcomes letters on money issues and problems but cannot offer individual financial advice.

© Copyright 1999 Washington Post Writers Group

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