Most Popular ArticlesJune 30, 2009
Aggregate versus periodic performance
The table above compares aggregate performance over 138 years. But aggregate results are not the only information pertinent to investing. You want to know periodic performance as well. For example, how did the systems perform during bear markets? How often and how brutally did the markets turn against you when the systems told you to stay the course? What were the monthly, annual, and decadal performances?
Bear market risks
Let’s first find out which system protects us better from the wrath of bear markets. Three growth curves are shown in Figure 1. The red one is the buy-and-hold benchmark. The 6- and 23-month MACs are shown by the blue and the green curve, respectively.
Each curve represents how an initial investment grows over time. A smooth and rising curve is preferred. All three investors invested $1 in the S&P500 total return index in January 1871. The buy-and-holder reinvested his dividends at all times. The two active investors reinvested dividends only when the S&P500 index was above its moving average but otherwise kept the proceeds in non-interest bearing cash.
Figure 1 not only shows which investment wins the race in wealth accumulation (6-month MAC), but also graphically illustrates how the three systems play out in historical bear markets. MACs won’t get you out at every market peak, but they would have preserved some – if not most – of your accumulated wealth. In contrast, passive advisors willingly handed over their clients’ hard-earned money to every hungry bear they encountered! Worse, by the time a passive investor realizes that a bear is eating his lunch, his strategy calls for him to do nothing to try to stanch his losses, lest he miss the market’s rebound. Don't laugh! That's the passive experts' "Missing out" logic!
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