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The chart above shows 12 years of the S&P500.

On December 31, 1998, the last trading day of the year, the SPX closed at 1229.23. That is within 10 points (not 10 percent, but 10 points!) of where it is today.

Over the course of these dozen years, we have seen a 68% rally (to the 2000 top), a 50% sell off (March ’03 lows), a 104% rally (October ’07 top), a 58% drop (March ’09), and an 83% move up (April 2010 highs).

The fee-driven industry continues to push buy & hold as the investing strategy of choice. I prefer to adjust my risk exposure relative to multiple inputs, one of the major aspects of which is Trend.

Of course, some academics will argue this point, but the chart above speaks volumes.

And the chart above is in nominal terms — 12 years of flat returns does not take into account inflation. Perhaps that is what dividends are for: To convert nominal performance of holdings into real after inflation numbers of Buy& Hold investors.

Category: Investing, Markets, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

57 Responses to “The Magic of Buy & Hold vs Trend”

  1. foosion says:

    >>The fee-driven industry continues to push buy & hold as the investing strategy of choice.>>

    Doesn’t the fee-driven industry make even more from churn than from buy & hold.

    Buying on the dips and selling at the peaks would clearly have been a better strategy, but frequent traders are just as likely to buy at the peaks and sell at the bottoms.

  2. Churn & Burn is the old school broker approach to commission generation.
    Net & Forget is what replaced it — lower turnover, market level poor performance.

    In between is intelligent risk management — its not market timing — to get out of the way of the major collapses

    You can do a grossly simplified version yourself, using only a moving average

  3. Livermore Shimervore says:

    I like BR one time comment on the sillyness of there be a bronze bull statue down in the financial district. A perfect oppourtunity to educate every pedestrian or pedestrian investor that there is no bull without a bear. We need a big scary bear a few feet from that bull. The idea that a middle income Wal-Mart shopping investor can go along with an investment religion that holds long only in a new global investment market that sees money trading hands that seemed hard to imagine not long ago in countless financial vehicles from hard to synthetic has reworked the whole kabuki theather. There may not even be a NYSE on Wall Street 10 years from now, but that’s another point. Whatever the point is that this is no longer a one-dimensional buy and sell universe. The idea that staying net long decade after decade brings you the greatest degree of stability and return is failing to understand the role that technology and new emerging investor classes have been playing for the last 20 years.

  4. machinehead says:

    On a risk-adjusted basis, the return from buy & hold over the period was absolutely awful — a Sharpe ratio of zero, with enormous volatility. An S&P dividend yield of 1 percent in early 2000 was an obvious clue to overvaluation, for anyone was paying attention.

    Not everything did badly, though. Alternative asset classes such as REITs, MLPs, gold, and emerging markets performed quite respectably over the period. Even boring long Treasuries delivered a solid, lower-risk return than stocks.

    Which underlines the point that trend following, applied to multiple asset classes, beats the living crap out of the obsolete philosophy of buying and holding equities.

    Stocks, on their own, are an unacceptably risky investment.

  5. nofoulsontheplayground says:

    Don’t forget buy & hold’s kid sister – dollar cost averaging, also known as random, zombie buying.

  6. Ny Stock Guy says:

    Looks like we still have a ways to go before we hit 1500. Again.

    Party on.

  7. dead hobo says:

    If buy and hold, to you, = buy and hold forever the, yes, it is a bad plan.

    To me, buy and hold means you can set and forget for a respectable period of time. Of course markets will oscillate during that time. Some oscillations might be big. But you can still wait out any big dip within a reasonable period of time … a few months at worst. If you can sell at a local top, then your earnings are goosed, but all is not lost if you miss a top.

    Eventually, you need to take profits. Preferably, this will be when really bad news breaks within a day or two.

    I don’t believe that any professional asset managers are smart enough to do a perfect job timing the market. Bluntly speaking, if any were that good, or even close, they would be rich beyond avarice and would not need to be working on commission based on the value assets under management.

    It’s my opinion that so much confusion is present with management pros today because, for the first time in years, the ‘fix is not in’ and Fed liquidity is only a part of the picture. QE2 is probably not structured so that big market gains are a certainty. Actual knowledge of economics is needed and many asset pros are woeful in this regard. Many would rather look at charts and pretend the past can be used to predict the future. This may work over the very short term, but is it wildly ridiculous for long periods.

  8. imflyboy says:

    No fouls says dollar cost averaging is random zombie buying, but what would the return have been for an investor who invested an identical amount on the same day of the month have been durning this time frame? Is there any easy way to test this?

  9. michaelb says:

    Looking more and more like Japan.

  10. ir192217 says:

    Well, yes, from 1999 to 2010 a “buy & hold regardless of what happens” strategy does not seem to be making sense. But what about the two decades prior to 1999? :-) What I am saying is that in the world of randomness we can always find some kind of chart to support our current beliefs.

    My second point is that in retrospect, for the majority of people, it may seem more reasonable to try to catch the trends and avoid the dips to the best extent possible. In reality, however, it is difficult to achieve.

    Furthermore, money managers, fund managers, etc. are simply hopeless in the sense that they are very slow. Even if some of them may be professional and responsible enough(which is a very rare thing), the amount of capital under their management makes it difficult for them to act quickly. And the management mechanics does not allow them to act quickly either.

    Actually, I wonder, why nobody pays attention to the concept of sizee of the funds that he or she plans to put to work? In my humble practice I noticed that investing 100,000 USD and 10,000,000 USD oftentimes call for a very different kind of strategies and planning…

  11. jimcos42 says:

    1998: Everyone knows B&H is so right.
    2010: Everyone knows B&H is so wrong.
    Some future date: Golly, B&H did OK.
    Takeaway 1: What everyone knows isn’t worth knowing.
    Takeaway 2: When it’s unanimous, it’s over.
    Press on my sweets.

  12. foo says:

    So what is the practical, actual solution? Suppose you don’t have time to micro analyze these trends yourself, and you’re only trading SPY, for example. How can I know when to sell or when to buy without losing more than say 10-20% of the previous periods gains, i.e. accounting for imperfect buy/sell timing? Is 10-20% even consistently achievable?

    If I took this period for SPY, what did, for example, FusionIQ predict? How much money would I have made or lost if I invested $10K at the beginning of the period and bought/sold using FusionIQ vs. just buying and holding SPY for the entire period, which would result in no gain.

  13. wally says:

    All you need to do, of course, is know what the trend is.

    Bwah-ha-ha-ha-ha!

    The fact that those ziggy-’V’ lines repeated once does not a cycle make and does not the future predict.

  14. louis says:

    So markets = trend, Gold and Silver = buy and hold, housing = F^@*K!#

  15. ir192217 says:

    @jimcos42

    Personally, I do not think that a straightforward contrarian approach works. How would you define “everyone”? For example, if in 1998 “everyone” in == “majority” and “everyone” wanted to “buy & hold”, then it is not quite clear to me how the market collapsed… I do agree with Barry here in that an “active” risk management would work best of all. The problem is that it is hard to execute.

  16. fmm says:

    Many years ago, while reading William O’Neill, it became clear to me why “Buy and Hold” is promoted by the financial industry. As you may know, O’Neill, in his usual writings, advocates a strict policy for the individual investor of selling when faced with an 8% loss in any holding. However, when he discussed his one-time position as a mutual fund money manager, he stated that he preferred that the investor refrain from buying in and out of the fund, despite holding a loss greater than 8%. He felt that investor actions forced him to liquidate positions that he wanted to hold onto. So, don’t make it hard on the money manager. He’s smarter than you and can tolerate you losing more than 8% of your money, as long as he retains enough cash to satisfy his ego.

  17. wally says:

    “The problem is that it is hard to execute.”

    Of course! Here is the dirty little secret: those red lines on the chart above were drawn in AFTER the white ones already existed. Show me the chart where the red ones are on there first and I’ll be richer than Buffett or Gates.

  18. the pearl says:

    Barry,

    The post is a good one, however, I think it poses an alternative more point of debate. There is little doubt that a successfully implemented trend following system will outperform pure buy and hold. This is well established with some of the academic work presented by a few select researchers. The real question is how are those NOT employing a successful trend following models doing compared to a simple buy and hold strategy? I would argue that THAT group which includes probably 80 to 90% of the individual investors commenting on the this blog and all the other various popular blogs are failing or will fail to beat a buy and hold strategy over most time frames. Most people would rather under perform because they seek an illusion of control than simply buy and hold and accept the results.

  19. cdrueallen says:

    A simple stock and bond asset allocation with yearly rebalancing should have done much better than a buy-and-hold stock portfolio in this volatile market but darn if I can find any data to support this theory.

  20. fmm says:

    Another favorite recommendation is diversification of assets. Diversification of assets allows one to risk his assets over many sectors, causing averaging down of gains and losses. Money managers will advocate this approach because it is a generally accepted practice and thus prevents them from being personally responsible and open to law suits when they lose half of your money in a general market meltdown. (Instead of market timing.)

  21. jimcos42 says:

    @ir192217
    Thank you. You’re correct. I overstated my sentiment.

    I’m sure that in 1998 and 2007 quite a few with a sense of discipline and the courage to act on their fact and historically-based knowledge saw that this would not end well and just didn’t stand in front of an onrushing train.

    So, can I get away with saying that “many” or that the “consensus” thought the key was to just “get in and stay in?” There was little doubt and great certainty. Now, there is great doubt and little certainty.

  22. jaymaster says:

    I propose a new title: “The Magic of Time Frame Selection”

    Pick Dec 31, 2002 or Dec 31, 2008 as your start date, and buy and hold will look pretty damn good.

    Pick June 30, 2000 or June 30, 2007 as your start date, and it looks absolutely horrible.

  23. Gator81 says:

    What wally said.

    I find it very easy to draw the red lines on the chart on top of the white ones. That’s because the major inflection points are easy to see when you’ve got enough data points before and after. But when you’ve only got data points up to today, it’s a lot harder to call an inflection point. By definition, using a 50-day moving average means you can’t even make a call, be it right, wrong, or indifferent, until 50 days after the fact.

    The November ’08 drop to 800 looked like an inflection point to me, and it even lined up nicely as a support level with the September ’02 bottom at 800. But no…. it had another 140 point drop in it, not bottoming until March ’09. After being fooled in November, and losing a big piece of my stake, I couldn’t bring myself to believe the bottom was in yet. So I waited. And lost. Again.

    Calling inflection points in trends is very highly sensitive to the timeframe you choose to use, i.e., the number of points you use in the moving average BR highlights in his comment above. The problem I find is that the best period to use in the MA calc is, itself, highly dependent upon how far back you want to go in the historic data. Statistically, the highly volatile periods really screw up my MA work.

    On that subject, a Q for BR or anybody else who’d care to give the A: Which do you find more useful, simple MA’s or exponential MA’s? And do you have a process or algorithm you find useful in normalizing the volatility in the data so the MA signal doesn’t get trashed by the noise? Just askin’…

  24. DeDude says:

    The most common “buy and hold” strategy actually also includes cost averaging. Many people put $250/month into their IRA account. Some of those people also use rebalancing between asset classes and will move money from winning to losing classes at regular intervals. I think that is probably as sophisticated as you want to get if you have a real job in the daytime. Most of the simple trend analysis is very predictable and therefore something that can be use by the big boys to milk regular investors.

    The question is whether regular investors can participate in the markets at all any more. It is beginning to require a lot of efforts to avoid losing money (being milked), and getting professionals to help/manage your money appears mostly to just shunt you down into a different stall to be milked. Individual day-traders will soon be gone, but what if individual investors also pull out, and maybe even retirement savers.

  25. gordo365 says:

    Buy and hold when PE’s are expanding. Moving averages to time in/out when PE are contracting.

    Too simple?

  26. FrankInTheFalls says:

    I would echo the sentiments of foo @ 12:34. Personally, I am sick of losing out on some recent major intermediate trends. Looking for help & guidance & not thinking I will get it from most professional money managers or mutual funds. After looking around, I am close to ready to take the plunge and subscribe to Fusion IQ.

    OK, BR this is your chance to do a commercial. I am inviting it, and any boasting is fine with me. I am new around here, so I don’t know if that has been requested in the past. If you tell me to simply try the free trial, I can accept that as your answer.

    ~~~

    BR: IQ is a tool that has a trend component, but strictly speaking, it is not a pure trend approach

  27. DeDude says:

    Investors really are like Cows walking into the barn.

    Over here you can get the GS hands on your tits, and the next stall down we have a nice and gentle hedge fund manager (be careful though he has been known to lock the door), and here is dear old Paul from the church he is so gentle your will barely notice it, the ForEx stall is known to be brutal, but at least it’s over with quickly, the goldie stall at least is so pretty you almost forget what is going on …….

  28. gremlin says:

    I was just looking at my 401k statement, for the past 10 years 2.2% avg return, this year 12%.

    A mix of index funds bought and held didn’t work very well. a crappy limerick in honor of buy and hold.

    I lost my ass in da dot com
    switched to buy and hold, couldn’t go wrong
    my 401k is a joke
    I’d do better with coke
    or just smoke my retirement inna da bong

  29. inkerton says:

    As others have pointed out, time-frame selection plays an enormous role. In 1998 and/or in 2000, P/Es were sky high and yields were virtually non-existent. So the prudent buy-and-hold investor at the time either bought XOM and MO type stocks, which did very, very well in the next decade, or bought gold at generational lows, etc.

    Buy and hold does not live in a vacuum. If you pretend it does, of course you can make it look bad. Always, always, always, it begins with the buy, and the purchase price is the single strongest determinant of returns. So if a buy and hold investor was stupid enough to buy an S&P index fund in summer 2007, or even in 2000, then yes it looks bad. But if you look at the track record of buy and hold over a meaningful period of time, thirty or fifty years, then it always, always looks good. Famously, even those who bought the day before the great crash of 1929 were rich, rich, rich if they held for the next seventy years. Is that beyond some people’s life spans? Irrelevant. Stocks can be willed, can be put in trusts, can be donated charity.

    Also, it is total bollocks to say that professional managers no longer encourage churn. Maybe not as much, but it is still encouraged. And forget about all of the online brokers, the only way they make any money at all is if people are buying and selling all of the time.

    Finally, buy and hold does not mean buy and forget. Of course there are certain times when one must take one’s profits, and other times when one must cut one’s losses based on the recognition of a failed investment thesis.

    This is a simplisic post, in other words, in my view.

  30. @gremlin,

    Index funds are great for trading. Not so much B&H. If you’re going to B&H I’d go for dividend funds. At least that way you are getting some cash flow out of the deal

  31. call me ahab says:

    though he had no crystal ball to consult- this boy had it all figured out-

    http://www.ttrove.com/images/Standups/887%20Charlie%20Brown.jpg

  32. Just a heads up:

    VIX is at a 7 month low.

    disclaimer: I own some options on it

    do your due diligence

  33. Long term says:

    I include B&H as an essential division of diversification. Leave a percentage of your equities in Hold no matter what. The remainder, look for some trends. This is also known as Balance.

  34. @call me ahab

    Yah, but he never lived down the ‘Lucy and the football trade’

    …..Then there was the kite eating tree investment

    Good grief, did you check his long term track record? Maybe he was just a good talker like Cramer :)

  35. jaymaster says:

    @how the common man sees it,

    A big YES to that! That’s the best advice I’ve read on the internets in ages. It took me years to figure that out on my own, and I don’t think I have ever heard a professional investment advisor of any stripe point that out.

    IMO, that is the best conclusion to derive from the chart that Barry posted here.

    And related, is this important quote from the Richard Bernstein post above: “…investors should remember that there IS a cycle.”

  36. nofoulsontheplayground says:

    If you bought and held the 1929 highs, I believe it took until about 1990 to break even, adjusted for inflation. I think with dividends it gets knocked back to around 1966 for break even. Most people can’t wait 37 years to break even on their investmetns.

    People who do not believe in timing or trends are going to have to live with sub par returns.

  37. mrsolar says:

    “Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep, and sheep get slaughtered.” — Gordon Gekko

    Gordon might have to update his list of assets that average managers can’t beat to include cash. Indeed, I agree that an approach of being fully invested all times is folly nowadays. Here’s the trick, though: for those of us with ‘real jobs’, what’s the best signal of a long-term trend change? I’d honestly thought the ‘death cross’ in July might be it, and I pulled back my long exposure at that time, but it turned out to be a headfake. Repurchasing on the golden cross around October 21 has thus far yielded positive returns, but not as good as buy-and-hold. Of course I realize there’s no simple answer, but what do you consider the key signals of an incipient trend change? In other words, how do I know we’re entering a bear market before I lose too much of my money?

  38. Mannwich says:

    Seems like simply betting on “red” or “black” these days in one’s favorite, but highly REGULATED, c@sinos would be a better bet than dumping any money into this rigged game. The outcome would be quicker and more painless too. Would allow for one to get on with living their lives, either way.

  39. wally says:

    “In other words, how do I know we’re entering a bear market before I lose too much of my money?”

    If there was a way to know then everyone would know… and then somebody would front-run it and that would change the rules. That’s why NO formula can ever be permanent in investment markets.

  40. imflyboy says:

    @ The Common Man Thanks for the link. According to the site an investor making monthly purchases would have earned 5.4%. I’m not sure if that includes any dividends that would have been paid by an index fund. I’m a noob and still have tons to learn, but I find it funny that people say B&H is dead. When I hear guys at work talking about their gains, they never mention the losers, tax bill and trading fees they’ve paid. I worry more about racking up fees and buying high/selling low too try an active trading approach. For folks like me who have a job that pays the bills does investing in a few low cost sector ETF’s make sense? You can get $0 transaction cost ETF’s through firms like Vanguard.

  41. tagyoureit says:

    I’ve pretty much lost faith in my personal ability to utilize the equity market as a reliable source of income or as means to increase wealth.

    Although, I’m still compelled to participate via 401(k) but the menu is quite limited (long only). Three large cap funds, three mid-cap, two small-cap, two international, 9 target-date funds, two bond funds and a money-market. The five year returns are all below 4%, big winners are Int’l 6%, Bond funds 6%. My return is currently negative of course. Even a Christmas Club account would have a better return.

    I think I will start a gratitude journal.

    March 03, Operating Iraqi Freedom, 107% rally indeed.

  42. tagyoureit says:

    The 104% rally ended with H.R. 2956: Responsible Redeployment from Iraq Act to begin troop withdrawls October 2007.

    (I wasn’t sure, so I looked it up first)

  43. louis says:

    “VIX is at a 7 month low”

    But what does this mean for the trend? Do indicators like this become part of the creep alarm that signal a trend? You have to define what indicators are truly a driver of a trend pattern. How can I know which indicators to trust?

  44. DeDude says:

    mrsolar;

    You have to understand that as soon as a sufficient number of people start using a particular system of buy or sell signals, it will be registered by the masters of Wall Street. They then design ways to bet against and profit from the fact that people have predictable reaction to this signal – and then the signal stops working for those who use it.

    All of these things are build on the fallacy that the stock market consist of predictable cycles – and sadly enough it does if enough people believe in these cycles (so they get a little tease to lure them in). But as soon as enough people believe in a specific cycle pattern our Wall Street masters come to exploit and destroy it. In the new world of supercomputers I would stay far away from use of “predictive” pattern indicators for selling or buying.

  45. hammerandtong2001 says:

    Boy, I wish I had this chart in hand in 1998.

    .

  46. cognos says:

    I love the bashing of “money managers”.

    There are many (truly many!) money managers with 15-25-35% avg annual returns over this period.

    They are mainly in the hedge fund community. Many of them have become billionaires. Many more will follow.

    Just because you were not smart enough to find them, bold enough to invest with them, or wise enough to pay their very high fees…. does not mean they dont exist.

    The only fault, is your own. Performance is the only thing that matters… all this chatter of “buy-and-hold” versus “trade the trend” is just, in the world of HF manager numero uno – “just mental masturbation”. It seems to feel good, satisfy something, but its useless.

  47. victor says:

    John Bogle’s (Vanguard titan) asset allocation is: 60% Vanguard index total bond market and 40% Vanguard index total stock market. Mind you he’s 81 and retired now, with a new heart transplant to boot. He checks the performance once a year and re-balances. Great guy!!! Anything wrong with that? Besides being unloved by Wall Street fees factory?

  48. Mike C says:

    Is that beyond some people’s life spans? Irrelevant. Stocks can be willed, can be put in trusts, can be donated charity.

    This has to be one of the most stupid things I’ve ever read. Irrelevant?…Irrelevant?..Irrelevant? WTF do you think I am investing/trading for in the first place. Its for my own personal benefit/consumption, not some trust or charity when I am six feet underground.

    Buy and hold. Depends on whether it is a secular bull or bear. 1966-1982, you better have some trend-following/active trading. 1982-2000, buy and hold works just fine. Buy and hold works when starting P/E ratios are single-digits. We aren’t even in that solar system at current valuation levels.

    Base case scenario 1. We make yet another run to 1500. The same people who sold in Mar 2009 finally rejoin just in time for the next 30-50% decline.

  49. Mike C says:

    Here’s the trick, though: for those of us with ‘real jobs’, what’s the best signal of a long-term trend change? I’d honestly thought the ‘death cross’ in July might be it, and I pulled back my long exposure at that time, but it turned out to be a headfake. Repurchasing on the golden cross around October 21 has thus far yielded positive returns, but not as good as buy-and-hold. Of course I realize there’s no simple answer, but what do you consider the key signals of an incipient trend change? In other words, how do I know we’re entering a bear market before I lose too much of my money?

    Unfortunately, I don’t think there is ANY holy grail. EVERY single TREND-following system is going to have some whipsaws. 2010 was a perfect example of that. IMO, hopefully over a lifetime of investing the whipsaws pale in comparison to missing the massive drawdowns like late 2008/early 2009.

    I got faked out as well on the death cross having bought SDS as a hedge around 1040. Here is another system to look at:

    http://dshort.com/articles/monthly-moving-averages.html

    My personal preference is to combine multiple trend-following indicators together and mandate most if not all are bearish to actually take action. My sense is one should always lean tactically bullish regardless of the macro backdrop.

    Apropos of nothing perhaps, but sometimes I wonder if a few vocal people from way back are still holding their short positions from late 08/early 09. I remember a few who crowed incessantly about how much they “made” in the collapse but never exited. I’m guessing they are well behind someone who fact did nothing but buy and hold through it all. Holding those inverse ETFs for the long-term is just destructive with the daily compounding.

  50. PDS says:

    BR….a global balanced portfolio, indexed to its benchmark of 45% US equities;15% EAFE; 40% LB agg (now Barclay’s) would have outperformed the S&P over same period by wide margin….400bps…..without the market timing risk or volatility of retunrs….btw….what are the risk adjusted returns of your portfolios?

  51. PDS says:

    BR…”Mad Money”…”Fast Money”…..”Mo Money”…”Show me the Money”……people like Jim Cramer (and by extension CNBC) who make a living off of flogging trading stock ideas to the unsuspecting public and who have an investment time horizon of lunch, agree with you that long term investing is dead…and why wouldn’t they?….if they didn’t no one would watch these schzoid shows..(mind you I don’t think anyone does now anyway if one believes the ratings!)…think about it….if everyone was a long term investor CNBC would be out of business and Jim Cramer would have to rebrand himself on dancing with the stars…

    ~~~

    BR: I never said “long term investing was dead” What I said was Buy & Hold is a recipe for losses

  52. cognos says:

    The points on bogle and a balanced 50/50 portfolio are good ones.

    I always thought it funny that no ones mentions a 50/50 portfolio of Pimco Total Return and SPX Index does pretty well for 20-30 years. It does well the last 10, and Even in 2008.

  53. Ha, I recall mentioning that it is all about dividends a short while ago as well. Oh, yeah, I wrote something about that I thought the stock market would circulate between 9,000 and 13,000 for the next several years and that what should matter more is if the stock is paying a dividend or not.

    Everything old is new again. Even if stocks “devalue”, but still pay out a dividend at least once a year, eventually the stock will rebound, so the ultimate benefit was steady dividend, then people can wait out the various cycles and sell at the price they bought, but with the benefit of that yearly dividend.

    However, just what percentage dividend can businesses actually afford to pay out on a yearly basis? Can they really afford to payout a 5-10% value of the stock dividend every year? And what stock price would that be based upon? the stocks high, or whatever it is at at the moment?

  54. Sunny129 says:

    ‘Holding those inverse ETFs for the long-term is just destructive with the daily compounding.’

    Just buy and holding them will go nowhere but more likely heading south in the long term! But they worked fine when ‘free market’ was functioning in 2008 but NOT any more in 2009 especially after March 2009 when funny accounting standard became ‘legal’ , Zombie Banks and imprudent Companies got bailed out on the back of Taxpayers and Ben dropped 3.3 Trillions from his heli cop.

    But if you buy them as an insurance in small quantity, sell covered (DTM) for at least 2-3 months and also matched with a put for each of them, I find them profitable in the intermediate term. you need a portion of them ‘free’ from option obligations in case of ‘black swan’ of any kind but in my view a terrorist attempt, real or imagined! I counter them with positive longs in Blue chips, Tech, materials, commodities but predominantly ETFs with dividends of different kind all over the World.

    Would like to hear someone’s experience on these inverse ETFs!

  55. DiggidyDan says:

    All of this depends on WHEN and WHAT you buy! If you are randomly buying the index at high valuations, you could get slaughtered.

    I’m looking at trying an automated rebalance tactical asset allocation (see Mebane Faber’s Paper “A Quantative Approach to Tactical Asset Allocation or Ivy Portfolio Book) type portfolio in an IRA to eliminate the taxes on selling assets to rebalance, while simultaneously using valuation indicators such as Shiller’s CAPE and Tobin’s Q to determine whether or not it is a good time to rebalance. I want to maybe write a software program that retrieves and runs the numbers periodically with alerts. Still working out the details.