Buy and Hold vs. Trading

[tsptalk]

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jgpalmerdds wrote a very interesting post in another topic but I am going to repost it here and address it here as this is a better forum for thisdiscussion, and it may beongoing.

From jgpalmerdds4/8/04
First of all, this is a wonderful site full of information and hard work. But having said that.The fact that you have left your money alone for the past year in stock funds, during a bull market, probably means that you have outperformed most people on this board who gamble each day moving there money in and out. If I were you, I would leave my $ alone. It is only one day! Resist the temptation. I would just watch for 6 months or so to see how people (like TSP Talk) are returning on their money versus being diversified and holding like yourself. That is what I am doing. I can tell you from chasing returns myself the past year and one halfthat it typically doesn't work (short timing the market, that is) I believe in trends, etc., more for the long term. I also believe that there is a time (for a longer periord) to be out of the market, like the bear market of 2000-2002. Disregard everything I have mentioned if you LIKE to trade each day, worry about it and lose sleep at night, then become addicted toit. Just my opinion from observation of the past three months of all the in and outers. I hope that I have not offended anyone, just my observation.

I took no offense. This is an ongoing debate, whether trading can out perform buy and hold. We are certainly not going to come to any conclusions here, but maybe we can help others decide which way they want to go in their investment style.

So far this year has been one of the most difficult trading environments you will see, with wild day to day swings and I admit I have not taken advantage of it very well. Some of the posters here have however. Ipost my longer term returns on
http://www.tsptalk.com/returns/returns2.htmland I have been lucky enough to have done pretty wellagainst some of the benchmark averages over the lastfew years. I actually consider myself a mid-term trader, playing the trends. But when we have trend-less action like we have seen this year, you have to actfast to take advantage of the swings.

One thing you said, "I also believe that there is a time (for a longer periord) to be out of the market, like the bear market of 2000-2002.", I thought was interesting. When do you get out? When do you get back in? What do you use to determine this? If we are down 10 or 20% do you jump back in? The Nasdaq ended losing over 70% of it's value. After 3 years, how do you trust any rally and get back in? It's just not as easy as saying get out during bear markets.

Like I said, it is a controversial subject and I hope we can hear from both sides of the issues. And yes, I do like it but I don't lose sleep over it. I haven't lost much hair yet either, but it does get a little grayer when I miss a rally.

Tom

 

[Guest]

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Tom,

I knew that I would get this question from someone, so here goes. First of all, a market genius I am not. Most everyone here on your website knows more than I do about technicals, charts, graphs etc., and about the TSP plan itself. This is evident by some of the questions that you have nicely answered that I have left. As I stated earlier, I have gotten in and out the last couple of years plenty of times, and fallen behind the market averages (by notbuying and holding) I have always been searching for the ultimate timing strategy, one that did not require me to check things each day (which I do) and would take about 5 minutes a week to manage. I finally feel that I have found it with ******. I found it off of a link at CBS marketwatch. com and did some research on it. They have a three year live track record (not very long but half of that was through a bear market) and then they have also backtested their plan back to 1989 with impressive results. As I told you earlier, they have had a "Buy" signal since April 3, 2003. I have subscribed for 3 months now and guess what, I pulled all my money out on March 12, 2004 (against any signal they had, because I was doing it on emotion) and I sat on the sideline (with private funds and TSP funds) and watched the prices lower (I thought I was smart) than soar above the price that I got out on. The moral: I took emotion into it instead of staying with there signal they had, and I came out ahead (and I wasted time doing it).

I know, lots of people like messing with this stuff daily, because it is kind of a hobby to them. That's fine, if that is what you want to do. I just don't want to spend lots of time fretting over this stuff, and then underperform the market average. This is what many people do when they buy a managed mutual fund that underperforms the S&P 500 (which 80% of managed funds do.) I don't have all the answers. I appreciate what you are trying to do. You want to help people aggresively manage their money better. I have only been at my gov't job for 3 months and I too know of people who have been only in the F or G fund since 9/11. These people are young, and they are doing that, wow! They are scared

In closing, I feel that if you are young (I'm 35) and you plan on being in the TSP for lets say 20 years, why not dollar cost average every 2 weeks (I am) If we look at the history of the averages our funds follow (stock funds), it is 10-11% a year over a 15-20 year period, right. Even when going through a bear market. What's wrong with that? The other extreme would be always buying low and selling high and taking advantage of market timing on a day to day, week to week basis. This is extremely hard and time consuming. I feel that the in between is where I am following now with ******. Only time will tell. I continue to enjoy your website and your information, even if I don't act on it, I am learning.. . . and the site is growing!! Did you notice that lately a lot of new influx. Many of them are looking to you for guidance. That's awful big shoes to fill. I wish you the best, because you do work hard, and deserve to outperform the market. Thanks again and have a happy blessed Easter

Joel

 

[tsptalk]

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Another great post Joel. Thanks for the kind words. I agree withjust about everything you said. It's all a matter of comfort level and risk tolerance. Like you said, it is a site to help people understand their TSP accounts and investment techniques. I certainly don't recommend timing the market to everybody. I should emphasize my longer term comments a bit more because, while many of the posters here appear to be short term traders, I think many of the lurkers (people who only read theposts)are longer term investors soaking it all in.

It's a lot of work to follow the market closely and it can be a big waste of time if you don't beat the averages. In particular when markets go up it is tough, if not impossible to beat their performance. It's when they go down that makes it worthwhile. Your***** system will probably help you avoid some of the losses duringdowntrend periods.I do like the idea of systems because it takes the emotion out of it all. That was kind of what I had in mind with this site. People can come here and see what's going on and either follow our moves, which takes the emotion out of it) or make their own decision based on what we are saying (a little more emotion).

I don't normally make transfers at the rate you are currently seeing. This has been a unique market environment lately. This is just how I play a trendless market. The uptrend will eventually resume and you will seefar lessmovement from me.

By the way, we are all dollar cost averaging. We all buy shares every two weeks no matter which technique you use.

I want to thank everyone for supporting the site. I really appreciate that many of you have spread the word. Most of us have several years before we can retire so we may be around a while. I learn something new everyday and I hope you do too.

Tom

 

[Guest]

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Your Welcome, I will continue to learn and monitor what you are doing. Thanks again.

Joel

 

[Raensleyar]

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Hello. I'm new to the forums and this website and want to say this is an excellent site that has been a long time coming. I certainly appreciate its presence and will pass along its presence to my fellow colleagues.

With regard to market timing ... my understanding was that it was one of the problems that arose in the mutual fund market. With the onset of the ability to trade on a daily basis with the TSP website ... is there a plan to prevent similar problems arising with TSP? Or is market timing and frequent trading only a problem when done with vast sums of money rather than the amounts shuffled by individual investors?

Also, does the TSP Board incur greater costs due to more frequent timing which must then be passed on to contributors somehow?

Just Curious.

 

[tsptalk]

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Welcome Raensleyar!

Thanks for the kind words. You have some very valid questions. I'll point to an earlier post that may answer your question...
http://www.tsptalk.com/mb/forum6/21.html

If that doesn't answer your questions, let us know.

Thanks for joining us. I appreciate that you will spread the word about us.

Tom

 

[Pete1]

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In regard to market timing verses buy and hold, I am starting to believe in the type of timing system that tradesinfrequently andincrementally.Risk reduction/capital preservationappears to be the primary benefit of this type of timing system.On fundadvice.com, they move in and out of the market in 25% increments based on purely mechanical signals. Since April 2003, they bounced back and forth between 75% equity funds and 100% equity funds. A few days ago, they went from 75% equity to 50% equity. Kind of scary. Hopefully, we are not headed for another bear market. I know that Tom sees bearish sentiment as a good thing. I hope you are right Tom However, it is troubling when purely unemotional timing systems start to point to a more bearish allocation. I am continuing to hold at 75%.

 

[tsptalk]

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I am a firm believer in the intermediate term "trading". This last three months the market has been oscillating (going up and down) and the way to play that type of market is to buy oversold conditions and sell overbought conditions. Easier said than done. If you were with me back in January when the site first started you know that I had said we were in for about three months of volatile up and action before the next leg of the bull market started. I "knew" it was coming and I still could only muster up about 1% plus gain from that. It's a tough market environment.

I do what my indicators tell me so if we are heading for a bear market it would surprise me about as much as ifthe Cubs won the world series. Just not likely. (sorry Cubs fans)

Back to what I was saying. There are oscillating markets and there are trending markets. We are oscillating now. We haven't broke the longer term trend. If that happens I may come to the other side. Until then, I'm buying the dips andselling the rallies. Once the market breaks above the trading range, I will take a morelonger term bullish stance.

Have a good weekend.
Tom

 

[Pete1]

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The Cubs just won the world series :^:^:^.

Seriously though, I hope that you are correct about the coming months. I appreciate you comments regarding contrarian sentiment. Jeremy Siegal also seems to give a thumbs up to contrarian investing strategies for the short-term. The bears do appear to be coming out. Mark Hulbert recently indicated that many investment newsletters are becoming bearish, usually a good sign for the market.

 

[azanon]

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By the way, we are all dollar cost averaging. We all buy shares every two weeks no matter which technique you use.

Not exactly. There's a little more to dollar cost averaging than just purchasing (any investment) shares at regular intervals. The concept doesnt really work unless the regularily timed contribution is made in the same investment (that can fluctuate in price)over a long period of time. That's the only way you ensure that you purchase more shares when the price is low, and less shares when the price is high. For example, if you were a poor market timer, you might have the share purchases going into the C/S/I fund when stocks are dropping, but then later get scared and have your contributions and monies in the G/F fun later, eliminating any benefits dollar-cost averaging would have provided.

Point - anyone's who's not buy-and-hold, is not "dollar-cost averaging" in its purest sense. IMHO, the term is not even applicable in a day-trading strategy, regardless of the contributions being a steady influx of monies.

 

[Guest]

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Well said, I couldn't agree with you more.

Joel

 

[tsptalk]

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Point - anyone's who's not buy-and-hold, is not "dollar-cost averaging" in its purest sense. IMHO, the term is not even applicable in a day-trading strategy, regardless of the contributions being a steady influx of monies.

I actually don't agree. As long as you buy a fixed dollar amount of a fund(s), I think you are dollar cost averaging. I have had my contributions (not allocation) set to50%C and 50%S fund since the S fund came out. Of course I move my balance around all the time but regardless of price, up market or down market, I buy those C and S funds every other week.

Dollar Cost Averaging:
Thetechnique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares when prices are high.

This is as opposed to depositing new money with atiming approach. You are basically talking about dollar cost averaging while buying and holding.

It's semantics I know and I understand your point.

 

[azanon]

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Unfortunately, (at least for me), its one of those things that's easier to understand, than explain.

I'm not interested in dissecting the definition of dollar-cost average, or dabbling in semantics so much as simply discussing whether one is ulitizing the advantages that "dollar-cost average" can provide an investor.

What you're doing might or might not fit that definition you pasted, however, if you dont actually hold (not sell) the investment you chose (it can be any investment with a fluctuating price), for a long period of time, then you're not reaping the "only" advantage dollar cost averaging offers: Specifically, if you sell the very shares you purchased only a few days ago and are thus no longer in your chosen investment, then what relevance is there TO YOU with the price of that investment continues to fluctuate after that. (answer: none, cause you no longer own it).

Ack, that isnt good enough. The best way i can explain this is with an example:

Take an example where a price of a stock is initially $10 dollars. Lets say over5 years, the price fluctuates wildly from as high as $14 dollars, to as low as 7 dollars, then 5 years later, its goes back to exactly $10 dollars a share, meaning 0% gain in the stock price. If an investor "dollar cost averaged" buying that stock over that period of time and retained ownership of all shares purchased, his "cost basis" would probably be about $8.70-$9.30 or thereabouts (just a hypothetical guess), and he would have actually made a healthy profit due to just volatiley alone, cause he bought more shares when it was cheaper. (which is why i suggest dollar-cost averaging for volatile investments, like aggressive growth funds).

In your case, you were never reaping the benefits of the price fluctuation because you were liquidating all your shares within days of purchasing them at a price point very similar to what you paid for it in the first place, so how could you say you benefited even close to as much from dollar-cost averaging as the buy-and-hold investor?

Lets use an extreme opposite example, justto emphasize clarity on this: Lets say i have my TSP set up to purchase 100% C, but the dayafter they deposit it, imove everything to G fund. And i do that for 5 years.Do you think i benefited as much from dollar-cost averaging as the buy-and-holder simply because i had it set up to buy C fund stock, though i sold it for pennies difference the next day?

If i didn't pursuade youwith that response,lets just agree todisagree .

 

[Rolo]

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I'll have to agree with Az on DCA. Yes, it is fixed dollar amounts and at regular intervals, but on the premise of leaving them alone indefinitely.

"An investment strategy designed to reduce volatility in which securities, typically mutualfunds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought. also called constant dollar plan."

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Dollar Cost Averaging
A popular investment technique that calls for investing the same amount of money in stocks each month, quarter or year. The advantages of this strategy are that it requires no effort to "time" the market (such efforts usually fail), and it automatically causes you to buy more shares when they are cheap and fewer when they are expensive. The disadvantage is that, because in the long run stocks tend to rise, most of the time investors are better off investing a lump sum all at once. In the long run, this leads to greater gains than dollar cost averaging, but in the shorter run poses risks many investors can't accept.
​

We do..."Dollar Cost Timing"...? huh? yeah? <nudge, nudge>


On that note, this thread reminded me of an idea I wanted to bounce. (It is simple, but I am undecided on how I want to handle my TSP.)
Have all new contributions go to the G fund by default. Wait for a good buy point, then move it. "Buy point" can mean anything, really.

• 
  Waiting for a dip in a particular fund
• 
  Buying the fund running up the most, fastest
• 
  Waiting for a rally confirmation (which probably would have been a good idea these past few months)
• 
  Go with the TSP Talk herd: put it where everyone here has the most allocated
• 
  Be the dissident: go against the TSP Talk herd

Thoughts? Dumb idea? Has its place?

 

[azanon]

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My thoughts are there really is no default place to put your money that isnt an investment choice. By that I mean, choosing 100% G until any set time is saying (whether you like it or not) that you think the G fund is the best investmentat that timetill whenever you move it.

There probably are good times when the G fund has been a good choice - when the market is overvalued, when interest rates were 9% or higher(and rising, making bonds bad), or if one is just trying to mitigate risk when bonds arnt the way to go at the time to balance out your stock holdings.

Still, i knew several folks that were saying in the early 90s, in 95 and 96, etc, that the market is going to crash anytime. Well, it did take a lashing in 2000, but a lot of money was made for several years before that happened.

 

[Rolo]

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azanon wrote:

My thoughts are there really is no default place to put your money that isnt an investment choice.

I think that is just what I needed to hear;in other words, pick the best investment at the time--there is no "choosing not to choose"--"sheeeoroff the pot"..?

azanon wrote:

By that I mean, choosing 100% G until any set time is saying (whether you like it or not) that you think the G fund is the best investmentat that timetill whenever you move it.

To me, G is not an investment, it is cash--but, yes, that is my point. I honestly do not know if I like it or not, heh.

I suppose I have until Friday to decide which is the best investment, or to stay in cash, at the time.

 

[azanon]

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I think if you went back in history (early 80s, late 70s??) when the interest rates were higher than 15%, you might reconsider fixed income vehicles like G not deserving the "investment title".

15%+ return, and virtually no risk? I'd go for that "investment" anyday .

 

[Rolo]

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azanon wrote:

I think if you went back in history (early 80s, late 70s??) when the interest rates were higher than 15%, you might reconsider fixed income vehicles like G not deserving the "investment title".

15%+ return, and virtually no risk? I'd go for that "investment" anyday .

hehehe, I don't disagree, but, I don't know if you want the accompanying "Misery Index" of the time.

heh, I used those rates at that time to refute one of those rip-off "Military Benefits Association" guys just the other day. I hate :Xit when people just flat-out lie to you--I don't mean a "Does this make me look fat?" kind of lie, I mean an elaborate, deliberate deception. bleh. The whole office had a chuckle (and learned some things) since I had this guy on speakerphone. :dude: