MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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How We Eluded the
Bear in 2000
By Ulli G. Niemann
The date October 13, 2000 will forever be embedded in my
mind. It was the day after our mutual fund trend tracking
indicator had broken its long-term trend line and I sold
100% of my clients' invested positions (and my own) and moved
the proceeds to the safety of money market accounts. Some
people thought we were nuts, but I had come to trust the
numbers.
The shake out in the stock market, which started in April
2000, had all major indexes coming off their highs, violently
followed by just as strong rally attempts. The roller coaster
ride was so extreme that even usually slow moving mutual
funds behaved as erratically as tech stocks.
By October, the markets had settled into a definable downtrend,
at least according to my indicators. We sat safely on the
sidelines and watched the unfolding of what is now considered
to be one of the worst bear markets in history.
By April 2001 the markets really had taken a dive, but Wall
Street analysts, brokers and the financial press continued
to harp on the great buying opportunity this presented. Buying
on dips, dollar cost averaging and "V" type recovery were
continuously hyped to the unsuspecting public.
By the end of the year, and after the tragic events of 911,
the markets were even lower and people began to wake up to
the fact that the investing rules of the '90s were no longer
applicable. Stories of investors having lost in excess of
50% of their portfolio value were the norm.
Why bring this up now? To illustrate the point that I have
continuously propounded throughout the 90s; that a methodical,
objective approach with clearly defined Buy and Sell signals
is a "must" for any investor.
To say it more bluntly: If you buy an investment and you
don't have a clear strategy for taking profits if it goes
your way, or taking a small loss if it goes against you,
you are not investing; you are merely gambling.
The last 2-1/2 years clearly illustrate that it is as important
to be out of the market during bad times, as it is to be
in the market during good times. Want proof?
According to InvesTech's monthly newsletter it turns out
that, measuring from 1928 to 2002, if you started with $10
and you followed the famous buy-and-hold strategy, that $10
would become $10,957.
If you somehow missed the best 30 months, your $10 would
only be $154. However, if you managed to miss the 30 worst
months, your $10 would be $1,317,803! Thus, my point: Missing
the worst periods has profound impact on long-run compounding.
There are times when you end up better off by being out of
the market.
Interestingly enough, if you missed the 30 best months
and the 30 worst months, your $10 would still be worth $18,558,
which is 80% higher than the buy-and-hold strategy. This
all comes about because stock prices generally go down faster
than they go up. Wall Street and most people tend to overlook
the value of minimizing loss, and that is exactly why the
bear demolished more than 50% of many peoples' portfolios
while I and those who trusted my advice escaped the worst
of the beast's rampage.
© Ulli G. Niemann
Ulli
Niemann is an investment advisor and has been writing about
objective, methodical approaches to
investing for over 10 years. He eluded the bear market
of 2000 and has helped countless people make better
investment decisions. To find out more about his
approach and his FREE Newsletter, please visit: www.successful-investment.com.
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