This Article written by Chuck LeBeau was originally published in Trading Markets and has been since re-posted in many websites
It is a great article and it demonstrate the absolute need of having a valid exit strategy.
A very comprehensive study of the Dow Jones Industrials caught my eye recently and I want to share some thoughts and conclusions based on the data in the study. The data I will be referring to is from a study encompassing more than 100 years of daily data on the Dow Jones Industrial Average. (Black Swans and Market Timing: How Not To Generate Alpha, by Javier Estrada, International Graduate School of Management, Barcelona, Spain) The data presented in this study begins on December 31, 1899 and ends on December 31, 2006. In total the study encompasses 29,190 trading days. I have highlighted the data about the worst days because it is usually ignored.
1) A $100 investment at the beginning of 1900 turned into $25,746 by the end 2006, and delivered a mean annual compound return of 5.3%.
2) Missing the best 10 days reduced the terminal wealth by 65% to $9,008, and the mean annual compound return one percentage point to 4.3%. But avoiding the worst 10 days increased the terminal wealth by 206% to $78,781, and the mean annual compound return by more than one percentage point to 6.4%.
3) Missing the best 20 days reduced the terminal wealth by 83.2% to $4,313, and the mean annual compound return to 3.6%. But avoiding the worst 20 days increased the terminal wealth by 531.5% to $162,588, and the mean annual compound return to 7.2%.
4) Missing the best 100 days reduced the terminal wealth by 99.7% to just $83 ($17 less than the initial capital invested), and reduced the mean annual compound return to −0.2%. But avoiding the worst 100 days increased the terminal wealth by a staggering 43,396.8% to $11,198,734, and more than doubled the mean annual compound return to 11.5%.
The author of this study concludes that these outlier days in either direction (the Black Swans) are so rare that it would be impossible for market timers to capture or avoid them.
I strongly disagree.
First let’s look at what it is we want to do with market timing. Do we want to capture the positive Black Swans or simply avoid the negative Black Swans? It would seem obvious that we would want to do both but if we had to choose only one course of action it is clear that we can derive the most benefit from avoiding the negative Black Swans so let’s start with that. Let’s see if we can avoid big declines using market timing.
As director of quantitative analytics at SmartStops.net I recently directed a ten-year study of the stocks in the S&P 500 Index. The study was intended to measure the various peak-to-valley drawdowns of each of the 500 stocks. Any drawdown of 15% or more was identified and measured. Since this article is focused on big drawdowns (the Black Swans) we will only look at peak-to-valley declines of 60% or more. Here is the data:
1) Of the 500 stocks 267 of them had experienced a drawdown of 60% or more.
2) 175 of them had experienced a drawdown of 70% or more.
3) 105 of them had experienced a drawdown of 80% or more
4) And 51 of them had experienced a drawdown of 90% or more.
5) The average of the largest drawdown of the 500 stocks was 61.67%
Those numbers might seem high at first glance but they are actually understated by quite a bit. The drawdown study ended in May of 2008 and we all know that the market has gone down a great deal since the study so the magnitude of the drawdowns would be even greater if the same study were conducted today. Also, as in any long-term study of a group of stocks, the results are skewed by “survivorship bias”. There were a lot of stocks that might have been in the S&P 500 ten years ago but for one reason or another they are no longer in the current index. Some of those stocks have declined to zero and are not included in the study.
Having looked at the nature of the problem let’s get back to the task at hand. Can market timing help us to avoid these drawdowns? Yes, it definitely can. A logical application of trailing stops would have avoided most of the big declines. Here are the results using the SmartStops trailing exits that are available for free on our web site.
1) Of the 500 stocks only 4 of them had declines of 60% or more.
2) There were no stocks that had declines of 70%, 80% or 90%.
3) The average of the largest drawdown of the 500 stocks was 22.58%
Now I must admit that I think that our SmartStops trailing exits are more sophisticated and effective than most trailing exits because the SmartStops are adjusted daily for trend direction and changes in volatility. However any serious effort at limiting the drawdowns with conventional trailing stops would certainly have had a very positive effect in reducing the magnitude of these declines. As the quoted Black Swan study clearly shows the avoidance of big declines improves performance very significantly. Here is a reminder of how that works:
1) It takes a gain of 150% to recover from a 60% decline.
2) It takes a gain of 333% to recover from a 70% decline.
3) It takes a gain of 500% to recover from an 80% decline.
4) It takes a gain of 900% to recover from a 90% decline.
5) It takes a government bailout to recover from any decline greater than 90%
Skeptics of market timing usually argue that efforts to avoid big down moves will result in missing the biggest up moves. However[The Discount code is SG2FREE30]I have never seen a study that shows any evidence to support that preposterous assumption. If you limit your losses and are willing to enter on strength you will not miss any major up trends. With a little planning and effort you can capture the Black Swans on the up side and avoid the Black Swans on the down side.
Chuck LeBeau is director of quantitative analytics at SmartStops.net and co-author of Computer Analysis of the Futures Markets (McGraw-Hill). For more of Chuck's commentary, visit www.smartstops.net
Trading Market http://preview.tinyurl.com/beadqz
Feb 26, 2009
Quote of the day
“The highest form of ignorance is when you reject something you don't know anything about.”
Wayne Dyer (b1940)
Wayne Dyer (b1940)
Feb 25, 2009
Trading Messages From Mars
Chuck LeBeau Wisdom
"This excerpt is from Chuck LeBeau. Chuck happens to be one of the pioneers in the field of trading systems. His wisdom should be absorbed by all"
Michael Covel
Michael Covel is the Author of The Complete TurtleTrader & the bestseller Trend Following
Covel Is also the Director of the New Documentary Film Broke: The New American Dream
"[This] happens to be a true story, which contains a very valuable trading lesson that has influenced my trading for many years now. We thought the story might make an interesting topic...Here is the story: Back in the late 1960s I was a young commodity broker at E. F. Hutton and Company. Our office was a brand new high-tech office (for its time) which was considered the "flagship office" for E. F. Hutton. In this office about thirty brokers and as many clients shared one very large boardroom and there were no private offices. The brokers had elegant and expensive desks and the clients had a comfortable seating area in the front of the office where they could hang out and watch the tapes and monitor our state of the art commodity "clacker board". Sitting at my desk near the front of the boardroom I could read my Wall Street Journal and keep track of the commodity markets without looking at the board. By just listening to the rhythm and tempo of the mechanical clicks as the prices changed I could easily tell when anything important was going on because the tempo of the clicks would increase noticeably. Just in front of my desk were a half dozen comfortable sofas facing a high mahogany paneled wall with the tapes and the "clacker board". A gallery of traders, mostly retired "old timers" who were trading real commodities like grains and pork bellies, lounged around on the sofas plotting their charts and talking about life and the markets. They typically arrived early to get a good seat in their usual spot and then spent the day trading, exchanging commentaries and offering unsolicited advice to one another on any subject. For the most part they were a very sociable group who would take coffee breaks together and greeted each other on a first name basis. These traders enjoyed the elegant atmosphere and treated our well-appointed boardroom as their private men's club. (Were you aware that women were not allowed to trade commodities back in those days? My how times have changed!) However, one of these "old timers" kept to himself and was not interested in becoming a member of the friendly and often boisterous social circle. He usually sat quietly by himself intently watching the price changes on the commodity board and holding an old glass Coca-Cola bottle up near his ear. The vintage shaped Coke bottle had been emptied many years before and now contained only a 12-inch tube of bent and broken radio antennae which extended awkwardly out of the top of the bottle. Keep in mind that in the 1960s no one had yet heard of cell phones so the purpose of this Coke bottle was a real mystery to everyone. When the trader would talk to the bottle from time to time all the heads would turn and the traders nearby would try to listen to the conversation. But the trader spoke very softly and no one was able to eavesdrop on his conversations with the bottle. The traders knew that the fellow with the coke bottle was a client of mine and eventually a representative of the group came to me and explained that they were extremely puzzled about this guy and his Coke bottle and asked me if I knew what was going on. I didn't know the purpose or meaning of the Coke bottle but I was as curious as anyone was and I promised I would find out. The next time the client came back to my desk I promptly placed his order and then politely asked him about the Coke bottle. With a serious expression and no embarrassment he explained to me that the Coke bottle was an inter-planetary communication device that had been given to him by aliens. He said that the aliens were very interested in our commodity markets and they often gave him trading advice from their various observation points on other planets. He said that he had just had a message from Mars and they were buying soybeans so he had also purchased soybeans. After revealing his unique trading methodology he returned to his seat and resumed his whispered conversations with the Coke bottle. As soon as I revealed my discovery of the meaning of the Coke bottle to the other traders, all attention was immediately focused on the Coke bottle trader and the soybean market. The soybean market proceeded to go the wrong way and the trade from Mars was eventually closed out at a loss. The other traders were had no sympathy and were quick to begin ridiculing the the trader and poke fun at his beliefs. The next trade however turned out to be a big winner and the Coke bottle trader went from sofa to sofa telling his story and pointing to the clacker board while waiving his Coke bottle and bragging about the profitability of his most recent message from outer space. Because he was making money now his previous critics had to endure his bragging about his success on the current winning trade. As time went on and a few winning and losing trades later a clear pattern of behavior began to emerge. The Coke bottle trader was ridiculed unmercifully on his losing trades but was able to get his revenge and the last laugh during the winning trades. This trader might have been a little bit crazy but he wasn't stupid. He soon learned that his only defense against ridicule was to hold on to winning trades as long as possible and to quickly get out of his losses. As long as he was sitting on his sofa with a winning trade no one could tell him he was crazy and make cruel jokes about his messages from Mars. In fact while he was winning he was quick to wander around the room and ridicule the methods of the other traders who were not making as much money as he was. He displayed the profits in his trading account as hard evidence of the validity of his methods and offered copies of his statements as irrefutable proof that he was getting valuable advice from his alien contacts. Who could argue when his advice from other planets was obviously working? As a young broker this experience and the first hand observation of the Coke bottle trader who suddenly became profitable gave me my first important lesson about the importance of exits. I knew the entry signals had nothing at all to do with his success. His batting average was not any better than that of any other trader. However, this crazy old trader seemed to be able to make money consistently while other traders with more "sanity" and more valid entry methods were losing. Before long I was able to recognize that this man had become a successful trader simply by his efforts to avoid ridicule. He knew that he was vulnerable during his losing trades so he closed them out very promptly. His winning trades became his shield against the ridicule of the other traders and he kept his winners much longer than before his unorthodox methods were revealed. In the many years since this experience I have encountered many claims of success for entry methods that probably have even less validity than the Coke bottle messages. I have learned to look only briefly at the entries of winning traders and to examine their exit strategies very carefully. I am very fortunate that more than thirty years ago I learned from the Coke bottle trader that success in trading depends on our exits and not our entries."
Chuck LeBeau
"This excerpt is from Chuck LeBeau. Chuck happens to be one of the pioneers in the field of trading systems. His wisdom should be absorbed by all"
Michael Covel
Michael Covel is the Author of The Complete TurtleTrader & the bestseller Trend Following
Covel Is also the Director of the New Documentary Film Broke: The New American Dream
"[This] happens to be a true story, which contains a very valuable trading lesson that has influenced my trading for many years now. We thought the story might make an interesting topic...Here is the story: Back in the late 1960s I was a young commodity broker at E. F. Hutton and Company. Our office was a brand new high-tech office (for its time) which was considered the "flagship office" for E. F. Hutton. In this office about thirty brokers and as many clients shared one very large boardroom and there were no private offices. The brokers had elegant and expensive desks and the clients had a comfortable seating area in the front of the office where they could hang out and watch the tapes and monitor our state of the art commodity "clacker board". Sitting at my desk near the front of the boardroom I could read my Wall Street Journal and keep track of the commodity markets without looking at the board. By just listening to the rhythm and tempo of the mechanical clicks as the prices changed I could easily tell when anything important was going on because the tempo of the clicks would increase noticeably. Just in front of my desk were a half dozen comfortable sofas facing a high mahogany paneled wall with the tapes and the "clacker board". A gallery of traders, mostly retired "old timers" who were trading real commodities like grains and pork bellies, lounged around on the sofas plotting their charts and talking about life and the markets. They typically arrived early to get a good seat in their usual spot and then spent the day trading, exchanging commentaries and offering unsolicited advice to one another on any subject. For the most part they were a very sociable group who would take coffee breaks together and greeted each other on a first name basis. These traders enjoyed the elegant atmosphere and treated our well-appointed boardroom as their private men's club. (Were you aware that women were not allowed to trade commodities back in those days? My how times have changed!) However, one of these "old timers" kept to himself and was not interested in becoming a member of the friendly and often boisterous social circle. He usually sat quietly by himself intently watching the price changes on the commodity board and holding an old glass Coca-Cola bottle up near his ear. The vintage shaped Coke bottle had been emptied many years before and now contained only a 12-inch tube of bent and broken radio antennae which extended awkwardly out of the top of the bottle. Keep in mind that in the 1960s no one had yet heard of cell phones so the purpose of this Coke bottle was a real mystery to everyone. When the trader would talk to the bottle from time to time all the heads would turn and the traders nearby would try to listen to the conversation. But the trader spoke very softly and no one was able to eavesdrop on his conversations with the bottle. The traders knew that the fellow with the coke bottle was a client of mine and eventually a representative of the group came to me and explained that they were extremely puzzled about this guy and his Coke bottle and asked me if I knew what was going on. I didn't know the purpose or meaning of the Coke bottle but I was as curious as anyone was and I promised I would find out. The next time the client came back to my desk I promptly placed his order and then politely asked him about the Coke bottle. With a serious expression and no embarrassment he explained to me that the Coke bottle was an inter-planetary communication device that had been given to him by aliens. He said that the aliens were very interested in our commodity markets and they often gave him trading advice from their various observation points on other planets. He said that he had just had a message from Mars and they were buying soybeans so he had also purchased soybeans. After revealing his unique trading methodology he returned to his seat and resumed his whispered conversations with the Coke bottle. As soon as I revealed my discovery of the meaning of the Coke bottle to the other traders, all attention was immediately focused on the Coke bottle trader and the soybean market. The soybean market proceeded to go the wrong way and the trade from Mars was eventually closed out at a loss. The other traders were had no sympathy and were quick to begin ridiculing the the trader and poke fun at his beliefs. The next trade however turned out to be a big winner and the Coke bottle trader went from sofa to sofa telling his story and pointing to the clacker board while waiving his Coke bottle and bragging about the profitability of his most recent message from outer space. Because he was making money now his previous critics had to endure his bragging about his success on the current winning trade. As time went on and a few winning and losing trades later a clear pattern of behavior began to emerge. The Coke bottle trader was ridiculed unmercifully on his losing trades but was able to get his revenge and the last laugh during the winning trades. This trader might have been a little bit crazy but he wasn't stupid. He soon learned that his only defense against ridicule was to hold on to winning trades as long as possible and to quickly get out of his losses. As long as he was sitting on his sofa with a winning trade no one could tell him he was crazy and make cruel jokes about his messages from Mars. In fact while he was winning he was quick to wander around the room and ridicule the methods of the other traders who were not making as much money as he was. He displayed the profits in his trading account as hard evidence of the validity of his methods and offered copies of his statements as irrefutable proof that he was getting valuable advice from his alien contacts. Who could argue when his advice from other planets was obviously working? As a young broker this experience and the first hand observation of the Coke bottle trader who suddenly became profitable gave me my first important lesson about the importance of exits. I knew the entry signals had nothing at all to do with his success. His batting average was not any better than that of any other trader. However, this crazy old trader seemed to be able to make money consistently while other traders with more "sanity" and more valid entry methods were losing. Before long I was able to recognize that this man had become a successful trader simply by his efforts to avoid ridicule. He knew that he was vulnerable during his losing trades so he closed them out very promptly. His winning trades became his shield against the ridicule of the other traders and he kept his winners much longer than before his unorthodox methods were revealed. In the many years since this experience I have encountered many claims of success for entry methods that probably have even less validity than the Coke bottle messages. I have learned to look only briefly at the entries of winning traders and to examine their exit strategies very carefully. I am very fortunate that more than thirty years ago I learned from the Coke bottle trader that success in trading depends on our exits and not our entries."
Chuck LeBeau
Feb 24, 2009
A great Article...
By John Waggoner, USA Today
One definition of madness is doing the same thing over and over, and expecting different results. If you have tried to snatch up a cheap stock in the past six months or so, you're probably questioning your sanity. Cheap stocks just keep getting cheaper.
For people who like bargains, stocks remain tempting. Many stocks are lower now than they were a decade ago. Before you decide to dive in again, however, make sure you have an exit strategy. You'll save yourself some money and, sooner or later, you might lose that twitch.
For many years, selling a stock was considered something that was Not Done, like bringing a clown to a funeral. After all, stocks always went up. Patience was the only answer to a stock tumble.
These days, however, those who hesitate are often lost. Say you bought 100 shares of Bank of America on Dec. 31 at $14.08. Price: $1,408.
You could have argued that Bank of America, the nation's third-largest bank holding company, was a cheap stock. It had already fallen 63% since Oct. 1. And it sold for 2.3 times its estimated 2010 earnings. (The price-earnings ratio, or P-E, measures how cheap a company's stock is relative to its earnings. The higher the P-E, the pricier the stock. Bank stocks typically sell for lower P-Es than most other stocks, but 2.3 is still inexpensive.)
Cheap or not, BAC wasn't a great buy. By Thursday, BAC closed at $3.93 a share, meaning you have lost $1,015, or 72%. In short, you've suffered a devastating loss: To get back even after losing 72%, you have to gain about 270%.
Ideally, you'd like to sell before taking such a huge loss. But how do you decide when to sell a stock?
Dan Chung, chief investment officer for the Alger funds, has a few general rules about selling. If the company produces a startling earnings disappointment, for example, you should consider selling, he says. You might also consider selling if you think another stock has better potential.
But you should also set a limit on how much you are prepared to lose the moment you buy a stock. One way to make sure you stick to that limit is to use a stop-loss order, which tells your broker to ditch the stock if it falls to a specific price.
You can put in a new stop-loss order every day, using a day order, or you can specify that your stop-loss will be good until you cancel it. (These orders don't last for all eternity; depending on your broker, they may last only six months or so.)
The next question: Where should you set your stop-loss order? In most cases, setting the stop at a 10% loss makes sense. You'll have to earn 11% to get back even, but an 11% loss is not a fatal error. Had you set a 10% stop on your Bank of America investment, for example, you'd be out about $141, plus commissions, rather than $1,015.
A stop-loss might not help in all circumstances. If your stock is down 10% when the Standard & Poor's 500 is down 15%, for example, it's holding up reasonably well. Some highly volatile (and low-priced) stocks will move up and down 10% pretty frequently. And, inevitably, you'll have some stocks that fall 10% and promptly rebound.
"Basically, we're talking about controlling risk," says Chuck LeBeau, director of analytics for SmartStops.net, a website that tells you when to sell. When you buy a stock, LeBeau says, you can't control how much it will go up. But you can limit your losses by using a stop-loss order.
SmartStops.net uses proprietary formulas, based on a stock's general direction and its volatility, to determine when to sell. The stop recommendations change every day. You can monitor a portfolio of three stocks or exchange traded funds for free, or get five stop recommendations a day for free.
If you're thinking of selling a mutual fund, which is typically a longer-term holding, then you need to examine the fund's record against other, similar funds over time. By and large, if a fund has lagged behind its peers for the past one, three and five years, it's time to ditch it. The chart shows five funds with assets of more than $1 billion that fit the sell criteria.
One place to get further guidance: The website FundAlarm, which is aimed at telling you when to send your fund to Palookaville.
Many investors have been burned enough by this market to sit on the sidelines for a while. If you're brave, or even mildly mad, be sure to have a sell point in mind the moment you buy.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.
full link to the article
http://www.usatoday.com/money/perfi/columnist/waggon/2009-02-19-investing-stock-stop-loss_N.htm
One definition of madness is doing the same thing over and over, and expecting different results. If you have tried to snatch up a cheap stock in the past six months or so, you're probably questioning your sanity. Cheap stocks just keep getting cheaper.
For people who like bargains, stocks remain tempting. Many stocks are lower now than they were a decade ago. Before you decide to dive in again, however, make sure you have an exit strategy. You'll save yourself some money and, sooner or later, you might lose that twitch.
For many years, selling a stock was considered something that was Not Done, like bringing a clown to a funeral. After all, stocks always went up. Patience was the only answer to a stock tumble.
These days, however, those who hesitate are often lost. Say you bought 100 shares of Bank of America on Dec. 31 at $14.08. Price: $1,408.
You could have argued that Bank of America, the nation's third-largest bank holding company, was a cheap stock. It had already fallen 63% since Oct. 1. And it sold for 2.3 times its estimated 2010 earnings. (The price-earnings ratio, or P-E, measures how cheap a company's stock is relative to its earnings. The higher the P-E, the pricier the stock. Bank stocks typically sell for lower P-Es than most other stocks, but 2.3 is still inexpensive.)
Cheap or not, BAC wasn't a great buy. By Thursday, BAC closed at $3.93 a share, meaning you have lost $1,015, or 72%. In short, you've suffered a devastating loss: To get back even after losing 72%, you have to gain about 270%.
Ideally, you'd like to sell before taking such a huge loss. But how do you decide when to sell a stock?
Dan Chung, chief investment officer for the Alger funds, has a few general rules about selling. If the company produces a startling earnings disappointment, for example, you should consider selling, he says. You might also consider selling if you think another stock has better potential.
But you should also set a limit on how much you are prepared to lose the moment you buy a stock. One way to make sure you stick to that limit is to use a stop-loss order, which tells your broker to ditch the stock if it falls to a specific price.
You can put in a new stop-loss order every day, using a day order, or you can specify that your stop-loss will be good until you cancel it. (These orders don't last for all eternity; depending on your broker, they may last only six months or so.)
The next question: Where should you set your stop-loss order? In most cases, setting the stop at a 10% loss makes sense. You'll have to earn 11% to get back even, but an 11% loss is not a fatal error. Had you set a 10% stop on your Bank of America investment, for example, you'd be out about $141, plus commissions, rather than $1,015.
A stop-loss might not help in all circumstances. If your stock is down 10% when the Standard & Poor's 500 is down 15%, for example, it's holding up reasonably well. Some highly volatile (and low-priced) stocks will move up and down 10% pretty frequently. And, inevitably, you'll have some stocks that fall 10% and promptly rebound.
"Basically, we're talking about controlling risk," says Chuck LeBeau, director of analytics for SmartStops.net, a website that tells you when to sell. When you buy a stock, LeBeau says, you can't control how much it will go up. But you can limit your losses by using a stop-loss order.
SmartStops.net uses proprietary formulas, based on a stock's general direction and its volatility, to determine when to sell. The stop recommendations change every day. You can monitor a portfolio of three stocks or exchange traded funds for free, or get five stop recommendations a day for free.
If you're thinking of selling a mutual fund, which is typically a longer-term holding, then you need to examine the fund's record against other, similar funds over time. By and large, if a fund has lagged behind its peers for the past one, three and five years, it's time to ditch it. The chart shows five funds with assets of more than $1 billion that fit the sell criteria.
One place to get further guidance: The website FundAlarm, which is aimed at telling you when to send your fund to Palookaville.
Many investors have been burned enough by this market to sit on the sidelines for a while. If you're brave, or even mildly mad, be sure to have a sell point in mind the moment you buy.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.
full link to the article
http://www.usatoday.com/money/perfi/columnist/waggon/2009-02-19-investing-stock-stop-loss_N.htm
Feb 17, 2009
So Much for Buy-and-Hold Advice
So Much for Buy-and-Hold Advice
You bet on stocks. You diversified. You lost a bundle. Should you get out? Experts disagree.
SmartStops comment: In this day and age diversification offers very little protection and can even make things worse. You need protection on a stock by stock basis using SmartStops.
Excerpts: They were reassured that stocks have the best long-run returns, so they plowed their savings into the market—only to watch in dismay as government bonds outperformed stocks over an entire decade. Moreover, investors were lectured again and again on the wisdom of diversifying their portfolios internationally. So they did. But foreign markets have done even worse than their U.S. counterparts lately. The most exasperating example is Japan, whose key stock market index is now back to where it was in 1981.
What many investors have failed to realize is that "the long run" can sometimes be very, very long. So says London Business School economist Elroy Dimson, co-author with his LBS colleagues Paul Marsh and Mike Staunton of the 2002 book Triumph of the Optimists, which challenged work by University of Pennsylvania Wharton School professor Jeremy Siegel, author of Stocks for the Long Run. The climb back into the black after a fall can take even longer outside the U.S., says Dimson. In Italy, he says, stocks failed to keep up with inflation over a 73-year period through 1978.
But even in the absence of such a doomsday scenario, international diversification doesn't always lower the volatility of returns—because in major crises, stocks fall in every market. Thus, in 2008 global diversification isn't protecting investors from the financial crisis that originated in the U.S. In sum, two pillars of investment advice—buy stocks and go global—have proved to be weak reeds lately. No wonder pundits such as Jim Cramer, the CNBC stockpicker, are sounding off about "how the best way to invest is not to buy a bunch of stocks and just sit on them."
Link to full article:
You bet on stocks. You diversified. You lost a bundle. Should you get out? Experts disagree.
SmartStops comment: In this day and age diversification offers very little protection and can even make things worse. You need protection on a stock by stock basis using SmartStops.
Excerpts: They were reassured that stocks have the best long-run returns, so they plowed their savings into the market—only to watch in dismay as government bonds outperformed stocks over an entire decade. Moreover, investors were lectured again and again on the wisdom of diversifying their portfolios internationally. So they did. But foreign markets have done even worse than their U.S. counterparts lately. The most exasperating example is Japan, whose key stock market index is now back to where it was in 1981.
What many investors have failed to realize is that "the long run" can sometimes be very, very long. So says London Business School economist Elroy Dimson, co-author with his LBS colleagues Paul Marsh and Mike Staunton of the 2002 book Triumph of the Optimists, which challenged work by University of Pennsylvania Wharton School professor Jeremy Siegel, author of Stocks for the Long Run. The climb back into the black after a fall can take even longer outside the U.S., says Dimson. In Italy, he says, stocks failed to keep up with inflation over a 73-year period through 1978.
But even in the absence of such a doomsday scenario, international diversification doesn't always lower the volatility of returns—because in major crises, stocks fall in every market. Thus, in 2008 global diversification isn't protecting investors from the financial crisis that originated in the U.S. In sum, two pillars of investment advice—buy stocks and go global—have proved to be weak reeds lately. No wonder pundits such as Jim Cramer, the CNBC stockpicker, are sounding off about "how the best way to invest is not to buy a bunch of stocks and just sit on them."
Link to full article:
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