The Purpose of This Book
My goal is to provide you with a nonemotional, systematic approach to investing that will make money in bull markets and protect your portfolio, and even make money in bear markets. This will be accomplished with a simple-to-implement strategy that has less risk than buy-and-hold because you will be out of the market during those market declines. Based on the fact that bear markets follow bull markets, if you use a buy-and-hold approach you will always lose money in bear markets. That is why you need to abandon that approach and use a proactive approach that avoids these deadly market debacles, such as the one that cost investors $11 trillion in losses during the last bear market. As an investor, you need to realize that since 1900 there have been 121 market declines of at least 10%, and 32 of these declines were 20% or more.2
This book provides insight about the never-ending cycle of bull and bear markets, and how to take advantage of the market’s volatility. It will explain the true risks and rewards of investing, and above all provide an investing plan to sidestep the brunt of future bear markets. As a self-directed investor, you will be provided with a complete step-by-step investing approach to capture the market’s upside and minimize losses, if any, when the market starts to change its trend and begin to sink. Moreover, this book provides a realistic investing approach using a time-tested strategy to first determine the market’s direction based on a handful of indicators. Then after providing an appropriate universe of exchange-traded funds (ETFs) for investors of different risk levels (conservative, moderate, and aggressive) to consider, the focus shifts to using relative strength analysis to act as the filtering mechanism to select the best-performing ETFs for your investment dollars. Because ETFs have the edge in many respects, as is delineated in Chapter 4, “Exchange-Traded Funds—The Most Suitable Investment Vehicles,” stocks and mutual funds are not recommended as the investment vehicles for this strategy.
Just as an airline pilot needs instrumentation to safely take off and land at the planned destination, especially during weather turbulence, investors need a reliable dashboard of instruments to maneuver through the volatile and uncertain stock market. Before the flight, the pilot reviews his or her checklist before the plane leaves the ground. Likewise, a surgeon has a protocol to follow before, during, and after operating on a patient. Similarly, as an investor you need a complete plan of action before putting your money at risk in the stock market so you know exactly when to buy and sell. Otherwise, the results could be catastrophic, similar to what could happen to a pilot or surgeon who fails to properly follow protocols and monitor the situation during the flight or surgery.
Why I Wrote This Book Now
I’ve met too many individuals in all age groups, who as buy-and-holders lost a large portion of their wealth by being fully invested over the past decade or just since the last market top of October 9, 2007. Unfortunately, most of them stayed fully invested based on advice from their investment advisors or based on freezing and not knowing what to do. These investors would have been better off using a strategy such as a simple moving average price crossover (for example, see the ten-month moving average chart in Figure I.1) that would have gotten them safely out of the market in November 2007, thus avoiding the entire debacle, and back in the market in June 2009 for the ride up. Hopefully, most investors decided not to sell at the March 2009 market bottom because the market then rebounded over 60% into December 2009.
Over the years I’ve spoken with many investors, and I’ve discovered that for the most part, they have a limited knowledge of investment basics, while only a small percentage really understand the key factors. That is why the majority of investors use stock brokers, financial advisors, investment professionals, and mutual fund managers. A much smaller percentage of investors manage their own money. Unfortunately, the two bear markets have interrupted many investors’ plans for growing their wealth. Luckily, young people have time to recover their losses, although older individuals don’t have that luxury. Most self-directed investors also took a shellacking because they were fully invested, even though they may have been well diversified. And of course, a small percentage of self-directed investors probably did very well because they had a game plan that they followed religiously.
Figure I.1 S&P 500 Index with a 10-month simple moving average
Just as in football, soccer, basketball, and other competitive sports, both offense and defense are needed to win games; you need the same two elements to win the investing game. With no defensive strategy you will be continually faced with the bull and bear market cycles, and you may experience no profits after decades of investing. That is not the way to build wealth.
Millions of investors have lost close to $14 trillion combined in the last two devastating bear markets this past decade. This has had devastating consequences on their lives, their families, and their futures. Investors cannot simply buy-and-hold a diversified portfolio and not look at it for 5, 10, 15, or 20 years. They may be shocked they didn’t make any money at all, and after taking into account inflation and the opportunity cost of funds, they may actually come out behind. It is true that there have been no 20-year rolling periods where investors would have lost money if fully invested, but a number of those periods had very low returns—a few percent at best. Moreover, all that matters going forward is how the markets perform over the next 20 years or more. No one knows how that will work out from the investing perspective. That is why investors need a viable plan so that they do not repeat their mistakes of the past and possibly end up unable to retire or enjoy life to the fullest because of poor stock returns.
And that’s what this book will do for you. It will show you how to read the market’s overall condition, how to determine your risk level, what investing rules you need to develop, which ETFs to use, and how to put it all together to make better investment decisions, allowing you to sleep better at night.
This is a practical, easy-to-read book with an easy-to-understand investing strategy. All the data, charts, and information necessary for you to make intelligent investing decisions are readily available free on the Internet. All the key Internet sites are provided so you can get what you need. Additionally, for those of you who want more sophisticated tools, I’ve included a description of two user-friendly and reasonably priced software products that can provide tremendous insight into the stock market’s condition with the tools and weekly commentary to take advantage of the changing market conditions.
I want to point out ahead of time that you might find that the chapters on exchange-traded funds, stock market dashboard, and relative strength somewhat intense, long, and complicated—that is not the case. It was necessary to provide you with the critical background and details so that you can easily put the recommended strategy in place. After you have worked through these chapters in particular and the remainder of the book, I’m sure you will see how easy the strategy is to set up and use on a weekly basis.
This is not a book about day trading or trading stocks for a living. Instead, it offers investors a road map for handling their investments in a systematic, logical, and nonemotional manner. Day trading is for those individuals who possess a certain skill set and emotional temperament to handle the stress of minute-by-minute trading. Keep in mind that day trading is extremely difficult. For those with success in other fields or a high IQ, day trading is no place to try a new profession without proper training. Otherwise, the results can be disastrous, not only financially but also emotionally. For those readers interested in determining whether day trading is for them, I refer them to my book published in 2000 as a first step, titled Day Trading on the Edge: A Look-Before-You-Leap Guide to Extreme Investing. It is out of print, so check your local library or used books on the Internet. Of course, there are many other more current books on the subject that provide methodologies, trading tips, and psychological pointers that you can find on Amazon or at your local book store.