This is Why I prefer Index Funds :)

[jeromanomic]

I read through this post:
http://www.finance-guy.net/streetonomic/funds-beat-market

It made me think that buy and hold in an index fund is the best long term strategy.

What do you think?

 

[timsk]

I read through this post:
http://www.finance-guy.net/streetonomic/funds-beat-market

It made me think that buy and hold in an index fund is the best long term strategy.

What do you think?

Hi jeromanomic,
Over the very long term, i.e. 25 years plus, it ought to serve you reasonably well. The whole financial structure of the developed world is based around economic growth, therefore major indices like the S&P500 pretty much have to rise over the long term. Put it this way: if they don't, then we'll all be going backwards and the world will be full of (even more) very poor unhappy people.

Having said the above, personally, I don't favour putting all my money (or any of it in fact) into a long term index tracker - for two reasons. Firstly, there are management fees to pay which tend to be high. Secondly, such an approach is crude as it still requires good timing for it to work well.



The daily S&P 500 chart above is old - sorry. (I no longer subscribe to Stock Charts so I can't update it.) Nonetheless, it illustrates my basic point very well. If you bought an index tracker at the market highs in 2000 before the dot com bubble burst, or at the highs in 2007 before the financial crash, then you'd have got precisely nowhere in the twelve years to the end of 2012. It's only in the last two years or so that your capital would have appreciated in value, but that must be offset against the management fees you'd have been paying year on year since the start.

A much better approach in my view would be to track the ebb and flow of the market by buying long and selling short accordingly. An obvious way to do this would be via a basket of ETFs. Just using this very basic chart, you can see how effective it would be to buy when the green 100 EMA is above the red 200 EMA and to sell when it crosses back down. In the 17 years that the chart shows, you'd only have been caught out once using this method - with a 'false' sell signal in late 2011.

As always with any kind of technical analysis - it looks very simple with the benefit of hindsight. Will it be this easy and work this well over the next 10 or 15 years? Maybe it won't - who knows. However, I'd rather put my faith in a simple approach such as this than handing my money over to someone else and paying them for doing very little and hoping for a return on my investment.
Tim.

PS. Below is the best I can do to provide an up to date chart in MT4. It's weekly instead of daily as I can't condense the daily timeframe to show the whole period. Consequently, I've changed the EMAs from 100 and 200 to 20 and 40 respectively. This chart goes back a full 20 years to 1995, with the blue rectangle indicating the false signal during which you'd have lost money in all that time. Beneath it is a second second chart that hones in on the detail, indicating a buy on the last MA crossover at the open on 22.01.2012 @ around 1313 (see green up arrow on chart). Based on the chart, you'd still be holding a long position to this day and feeling pretty smug with yourself - with yesterday's closing price of 2108. That's a 60% return on your money in little over 3 years, which knocks the stats in the article you link to into a cocked hat!

 

[tar]

Dont forget to price in reinvested/dividends ...

Dow Jones total return = 36300

http://finance.yahoo.com/echarts?s=^DJITR+Interactive#

 

[gonnamakeit]

Timsk awesome reply....thanks

Jero....i have been looking into the same concept with a few added layers on complexity on this to use as my retirement pot.

i started the thread here

http://www.trade2win.com/boards/ind...tse-tracker-need-help-please.html#post2536612

the 100 / 200 crossover may have solved a lot of my problems - it keeps you out of the market at downtimes

100/200 as Tiimsk said i would use on dialy

and false signals in a choppy market are kept to a minimal than if one is using a single MA line without crossover

and surely as this is a simple MA it will keep on working - any reasin Timsk why you said would it continue working ?

have you been using it for years ???

i was using a 50 ema or 200 ema - NOT crossover but the in out method - was becoming a headache with many false signals and too much screentime

i feel this a a game changer - Timsk please can you let us know if you have been using this for your portfolio.

i also trade fx /options / stocks but they are high risk.

the retirement plan i am trying to construct is a safe, minimal risk pot which can compound over the years.

just by using the method by TIMSK i feel as you are avoiding downside you can get 10-15 % per year

now im coming up with ways to minimally play the downside to make these returns even great.

investing 1k per month at 15% annually - is a few million in 25-30 years. Thats my plan - can we make it happen ??? i think so

In the UK - with ISA tracker funds ( FTSE ) are cheapest 0.4% annually - also in an isa there are no buy/sell fees so you can park money when you want and go back in at no cost.

ill continue the details of this on the other thread i started as i dont want to hijack this - but please please share your thoughts in making this happen.

 

[timsk]

Hi gonnamakeit,
Looking at charts with the benefit of hindsight is easy - ask any T2W member! The charts I posted with 100/200 EMAs are curve fitted. This means that the EMAs are played with to extract the best possible returns with the least amount of drawdown. Will they look this good in 10, 15 or 20 years time? There's no knowing and it's best to assume the results wouldn't be anything like as impressive. To hope for or to expect a similar performance in future is unwise, IMO. I'll try and answer your questions as best I can . . .

. . .and surely as this is a simple MA it will keep on working - any reasin Timsk why you said would it continue working ?. . .

It will keep on working if the market continues to perform in a similar way. That's a mighty big if. It's worked well over the past 20 years because we've had strong bull markets which were very suddenly stopped in their tracks by the bursting of the dot com bubble in 2000 and then the financial crash in 2007. This resulted in relatively 'clean' trends up and down - which is necessary for a trend following strategy of this kind to work. In future, if the market chops about in a sideways range then, like many (most?) trend following strategies, this approach will bleed money.

. . . i feel this a a game changer - Timsk please can you let us know if you have been using this for your portfolio.. . .

I wouldn't get too excited too soon if I were you gonnamakeit! One of the big drawbacks with a long term strategy like this is that you won't know how successful it is until many years down the line. If it bleeds money for the next 10 years and you stop trading it, sods law dictates that that is when it will start to work well!

As for me actively trading it - no I'm not. The reason is that I believe the market is overbought and a substantial retracement is due at any time. My fear is that if I pile into the long side (as indicated by the MAs), I'll be buying at the height of the market and my investment account will go into drawdown from the get go. Therefore, I've resolved to wait until the next MA crossover.

. . . just by using the method by TIMSK i feel as you are avoiding downside you can get 10-15 % per year . . .

Beware of your feelings when it comes to trading and investing would be my advice. If the markets continue to have fairly clean and sustained moves then yes, 15% p/a ought to be attainable. However, there will be false signals which will get you in and out late with the result that the drawdown will be large and need to be offset against any profits made. It's certainly not a one way ticket to easy money year on year.

. . . investing 1k per month at 15% annually - is a few million in 25-30 years. Thats my plan - can we make it happen ??? i think so . . .

£1k invested each month over the next 25 years means that you'll have £300k invested in total. That's the only thing I can say with any certainty. Whether or not it will have grown into a few million is anyone's guess. Sorry not to be more enthusiastic - but I'm anxious not to give the impression that this is some sort of holy grail. It's not. Furthermore, like any trading methodology, it carries substantial risks and there's a real possibility that anyone who tries to implement it could lose money rather than make money.

Tim.

 

[gonnamakeit]

thanks

see i invest monthly in a ftse tracker anyway - ive been buying and holding - that's what i have been doing so far for my long term pot ( retirement )

some of the leading investment gurus have been quite vocal in that 96% of managers cannot beat the index - so just invest in the index.

so im doing that anyway but for example last year my money sat through 2 10% downturns.

all i am using the emas for is stepping my money out of the market when we have a downturn.l am just entering in back in lower....that's it

so can i really loose money - im just managing what i have right ??

 

[samspade79]

Hi jeromanomic,
If you bought an index tracker at the market highs in 2000 before the dot com bubble burst, or at the highs in 2007 before the financial crash, then you'd have got precisely nowhere in the twelve years to the end of 2012. It's only in the last two years or so that your capital would have appreciated in value, but that must be offset against the management fees you'd have been paying year on year since the start.

This is a poor point. What he's saying is that if you had bought at ANY time OTHER than the 2 market highs you'd be absolutely flying.

So yes, if you want a long term investment, get a tracker and go long and go to bed. That's what buffet does and he's richer than anyone on here.

 

[tar]

This is a poor point. What he's saying is that if you had bought at ANY time OTHER than the 2 market highs you'd be absolutely flying.

So yes, if you want a long term investment, get a tracker and go long and go to bed. That's what buffet does and he's richer than anyone on here.

Not to mention dividends earned ...

 

[timsk]

This is a poor point. What he's saying is that if you had bought at ANY time OTHER than the 2 market highs you'd be absolutely flying.

So yes, if you want a long term investment, get a tracker and go long and go to bed. That's what buffet does and he's richer than anyone on here.

Hi samspade79,
I'm not sure I've understood you - or why you think my point is a poor one. When the market is at all time highs, your logic makes perfect sense and I agree with you. However, as soon as the market reverses, then the conventional index tracker doesn't perform so well. So, for example, had we been having this discussion 6 years ago in May 2009, wouldn't the exact opposite of what you're saying also be true? Namely, that if you had bought at ANY time OTHER than the 2 market lows you'd be absolutely gutted?

As I say, perhaps I've misunderstood your point - apologies if that's the case.
Tim.

 

[samspade79]

No, because the argument was that if you bought at the highs you had to wait ages to get into the black. That's true - if you were unlucky enough to buy at either of the highs, which is pretty hard to do. It's a very bad "reason" for not buying a tracker.

 

[gonnamakeit]

have back tested the 100/200 and its just works out poor - have testing it over 15+ years of data

end up getting in too late and getting in too late and loosing too many points

i just need a reliable way of getting out of the market and maybe the best to go back in would be go back in parts at every say 5% fall...

any thoughts ??

 

[gonnamakeit]

bump

 

[malaguti]

bump

find a more reliable way of timing the market
buying at every 5% fall is pointless, you still need to know when to get out otherwise you too will suffer when it starts turning down

so you've looked at the ema's, what else have you tried?
have you spent time looking at what makes up the up trends, so you have an idea as to what to look for next time to get in and therefore when its looking like its peaking?

also when you say you backtested the last 15 years, TIMSK presented a chart going back to 1997. can you be a little more specific as to it got you in too late, etc. how much better would you have done not using the emas

you realise you're never going to find something that gets you in at the bottom, and out at the top right? That in a trend, you should ideally aim for as little as 50% of the trend, the other 50% taken up by 25% at the bottom, 25% at the top
(roughly speaking of course)
I could easily find you an indicator that worked better, but nothing is going to be right forever and so you need to find a reliable way that works for YOU

buy and hold doesn't work unless you know when to buy, and how long to hold for
TIMSK made a very valid point about buying at tops you would have seen no return, also you would have seen no return had you bought at the bottom points, it all depends what time horizon is meant by buy and hold

 

[tar]

Looking at cash index long term charts is misleading , when you invest long term you're going to buy etfs like DIA and SPY , and thus you should add around 2% annual return from dividends earned , so if you invested in the Dow before 10 years then the Dow for you now isn't 18086 its much higher .

 

[gonnamakeit]

So ive spent a long time trying to make this work and this is what i have come up with - please let me have your thoughts so if its needs further tweaking i can.

So idea was to invest for the future / retirement through a tracker. FTSE tracker - lowest fees so most compounding.

Again this would be the main pot for my retirement - so i basically have my eggs in this basket. The risk is low as its a tracker and i have 3 parts to this to maximise returns and minimise risk.

I know not to put all eggs in one basket but as I have different strategies which are outlined below I really do not see the risk in this – and would very much value your feedback / critique on this.

I found the book by Glenn Martin very very helpful – he uses the adapted MA which I have included as one of my strategies to make this hopefully bullet proof.

We will assume that £x will be invested every month into this strategy.

1) 70% ( or can be adjusted ) of the pot x should be drip-fed into the tracker by direct debit each month – this will allow you to enter at different levels and average out the cost of buying – simple.

2) The remaining 30% should be kept in cash and divided into 10 parts – the amount in each part will change every month.

a. Every 5% drop in the market from all time high 7125( at present ) – 10% of this pot should be added in.
b. This pot will be used up only when the market has fallen 50% - but it has then allowed you to keep buying as the market drops in an organised way
c. Every time a new high is made this pot is recalculated into 10 parts and the 5% rule restarts


3) We have to think of times of market crashes which do happen from time to time – at times the market has dropped over 50% and cannot let the whole pot go down so this part covers large crashes.

a. A full crash is when the 100 MA crosses the 200 MA + another 10% drop in the price.
b. When this happens all funds should be removed from the tracker – but part 1) and 2) should still continue
c. The full amount should be removed and divided into 5 parts
d. Each of the 5 parts should then renter the tracker at intervals of 10% below the exit price.
e. Again we are anticipating worst case another 50% drop in the market so you are able to enter at much better prices
f. if the 100/200 cross over again before a 50% drop then the whole lump gets re-entered as the momentum has now changed to a bull market.
g. This scenario has happened twice since 1996. And the market has dropped a further 40% and 30% after the initial crossover + 10 % drop.
h. Any extra funds can be added in when f. occurs


So this has taken me a long time to put together and is what I am doing – I would very much appreciate your view – apologies for the long wondedness of it but hopefully it has been written as simply as possible.

 

[malaguti]

a. Every 5% drop in the market from all time high 7125( at present ) – 10% of this pot should be added in.
b. This pot will be used up only when the market has fallen 50% - but it has then allowed you to keep buying as the market drops in an organised way
c. Every time a new high is made this pot is recalculated into 10 parts and the 5% rule restarts

In 2008, when the high was 6750 a 10% drop would have taken you to almost 6000 and at that point the MAs have crossed so you have entered 20% of your pot.
price drops another 10% so by now you have entered 40% of your pot and this is your market crash scenario
so in just one market crash, you have managed to lose 40% of your pot
the same happened in 2011, so in 3 years you have lost almost everything.

I might have misunderstood, proabably I have, but this scenario is more than a possibility then?

Also I notice that you buy when it goes down, which is counter intuitive as you want to be buying when its on the way up, so have you thought about increasing your pot for 5/10% rises in the index?

 

[gonnamakeit]

Thanks for your response – yes I think there is a mixup along the way – let me explain what would happen in 2008 in detail.

Firstly I am using IG MT4 feed for crossovers.
FXPro closes from 10pm to 8am so movement within these hours is not recorded – hence this is not accurate – IG is 24hr feed so that what I use and that’s the image below for this period.

Also @malaguti – part 2 of the strategy involves having a small pot (30% of the monthly drip feed) to put into the market at every 5% dip

Peak was in Oct 2007 @ 6750 – this was the high so everything is judged by this.

This strategy is in place to replace Buy and Hold – I don’t think that’s a viable strategy so this is to try and pull funds out on the way down and buy back lower.

Also to try and strategically place funds as the market goes down.

The crux of this is that as it’s the main UK index over time the value must go up also as dividends are pumped in every year – year on year this must grow.
The dividends are very important so that you need to spend as much time in the market to gain benefit from this.

So peak in Oct 2007 @ 6750

MA crossed on 22/1/08 @ 5513

10% lower than MA cross is 18/9/08 @ 4900

So between the peak @ 6750 and the MA + 10 % cross the following would be happening.

Strategy 1 for drip feed would be continuing as per normal every month

Strategy 2 for the 5% rule would have kicked in at the following levels

@ 6412 5% down
@ 6075 10% down
@5737 15% down
@5400 20% down
@5062 25% down
@4725 30% down
@4387 35% down
@4050 40% down
@3712 45% down

So you can see above that we were getting units at much better prices – so when the index goes up the returns would be considerable.

Then on 18/9/2008 strategy 3 kicks in as we hit 10% below the MA @ 4900 – then the complete pot is pulled out – strategy 1 and 2 continue as per normal.

The full amount which is pulled out is divided into 5 parts as explained and placed back in at the following levels

Part 1 @ 4410 10% down
Part 2 @ 3920 20% down
MA cross @ 5000 so rest of pot back in.


So as you can see it’s a systematic way of investing long term as buy and hold just will now provide a large % return long term

This system should be able to provide that.

Again im hoping you can stay with the detail above – I would really appreciate thoughts and feedback to let me know if you are convinced that this would work and if not why.

Hoping you enjoyed the share and thanks

 

[malaguti]

Thanks for your response – yes I think there is a mixup along the way – let me explain what would happen in 2008 in detail.

Firstly I am using IG MT4 feed for crossovers.
FXPro closes from 10pm to 8am so movement within these hours is not recorded – hence this is not accurate – IG is 24hr feed so that what I use and that’s the image below for this period.

Also @malaguti – part 2 of the strategy involves having a small pot (30% of the monthly drip feed) to put into the market at every 5% dip

Peak was in Oct 2007 @ 6750 – this was the high so everything is judged by this.

This strategy is in place to replace Buy and Hold – I don’t think that’s a viable strategy so this is to try and pull funds out on the way down and buy back lower.

Also to try and strategically place funds as the market goes down.

The crux of this is that as it’s the main UK index over time the value must go up also as dividends are pumped in every year – year on year this must grow.
The dividends are very important so that you need to spend as much time in the market to gain benefit from this.

So peak in Oct 2007 @ 6750

MA crossed on 22/1/08 @ 5513

10% lower than MA cross is 18/9/08 @ 4900

So between the peak @ 6750 and the MA + 10 % cross the following would be happening.

Strategy 1 for drip feed would be continuing as per normal every month

Strategy 2 for the 5% rule would have kicked in at the following levels

@ 6412 5% down
@ 6075 10% down
@5737 15% down
@5400 20% down
@5062 25% down
@4725 30% down
@4387 35% down
@4050 40% down
@3712 45% down

So you can see above that we were getting units at much better prices – so when the index goes up the returns would be considerable.

Then on 18/9/2008 strategy 3 kicks in as we hit 10% below the MA @ 4900 – then the complete pot is pulled out – strategy 1 and 2 continue as per normal.

The full amount which is pulled out is divided into 5 parts as explained and placed back in at the following levels

Part 1 @ 4410 10% down
Part 2 @ 3920 20% down
MA cross @ 5000 so rest of pot back in.


So as you can see it’s a systematic way of investing long term as buy and hold just will now provide a large % return long term

This system should be able to provide that.

Again im hoping you can stay with the detail above – I would really appreciate thoughts and feedback to let me know if you are convinced that this would work and if not why.

Hoping you enjoyed the share and thanks

I thought I had it, clearly I didn't..its not the price feed that will be negligible
you mentioned that 1 and 2 and then strategy 3 yet I thought you had just two pots of money..70% and 30%.
I'm not trying to catch you out, just trying to understand
lets assume you start with 10k

so strategy 1 70%, regular drip feed each month..
so 7000 in total over how long? £500/month?
when do you exit strategy 1? when will you reenter once you've exited (again at same time each month?

strategy 2, remaining 30% so £3000 is added 10%at every drop of 5% in the market
when do you exit strategy 2...market crash scenario? and then after exit, reentry at cross of MAs +10%?

you mentioned now strategy 3..whats that one?

the crux is going to be your 70% pot..can't quite get what you're going to do with this

 

[gonnamakeit]

Thanks for the reply...i think ive overcomplicated this as it really is quite simple ( in my head anyway )

let me try and simplify it.....

This is a simple plan to build up a savings pot over many years using a a tracker due to the low fees.
The tracker investment is a passive investment but i have made few steps to turn it into an active strategy - so that returns can be ++++ and also we are out of the market during crashes with a view to getting back in the market lower.

Lets assume we have £1000 per month for this savings plan.

Strategy is divided into three parts ( exact details are listed above )

Part 1 - this is simple drip-feed monthly - same mount every month. Benefits of this pound cost averaging have been proved. But in this 70% of the monthly money ( in our case £700 is used )

Part 2 - the remaining money 30% per month ( 300 in our case ) is kept in a cash account until the market falls - so 300 is added to this acc every month. This money is injected at 5% drops in the market to always get a better price ( full details above )

Part 3 - this wont happen often at all but during a market crash this allows us to pull all our money out from the tracker and reinject it at further 10% drops in the market. If we stayed in our acc could drop by 50% in a severe correction - so this example may pull us out at 20% down and then renter as the market continues to drop.

As this is a long term view after any down turns we do have upturns and then we have now bought into the market at mush lower levels so our % back will be ++++ compared to any buy and hold strategy.

I also trade more riskier ways but this meant to the main investment tool for retirement. I have read a lot on trackers etc etc and on buy and hold.
I really dont think with top heavy markets buy and hold can work well - we need a way to strategically run inside a tracker which is what i have put together above.

I feel it has the possibility of changing lives - showing people how to outperform the market consistently - and the reason why i have posted here is to try and find flaws in this so i can go back and tweak it until i have something which works well.

 

[malaguti]

Thanks for the reply...i think ive overcomplicated this as it really is quite simple ( in my head anyway )

let me try and simplify it.....

This is a simple plan to build up a savings pot over many years using a a tracker due to the low fees.
The tracker investment is a passive investment but i have made few steps to turn it into an active strategy - so that returns can be ++++ and also we are out of the market during crashes with a view to getting back in the market lower.

Lets assume we have £1000 per month for this savings plan.

Strategy is divided into three parts ( exact details are listed above )

Part 1 - this is simple drip-feed monthly - same mount every month. Benefits of this pound cost averaging have been proved. But in this 70% of the monthly money ( in our case £700 is used )

Part 2 - the remaining money 30% per month ( 300 in our case ) is kept in a cash account until the market falls - so 300 is added to this acc every month. This money is injected at 5% drops in the market to always get a better price ( full details above )

Part 3 - this wont happen often at all but during a market crash this allows us to pull all our money out from the tracker and reinject it at further 10% drops in the market. If we stayed in our acc could drop by 50% in a severe correction - so this example may pull us out at 20% down and then renter as the market continues to drop.

As this is a long term view after any down turns we do have upturns and then we have now bought into the market at mush lower levels so our % back will be ++++ compared to any buy and hold strategy.

I also trade more riskier ways but this meant to the main investment tool for retirement. I have read a lot on trackers etc etc and on buy and hold.
I really dont think with top heavy markets buy and hold can work well - we need a way to strategically run inside a tracker which is what i have put together above.

I feel it has the possibility of changing lives - showing people how to outperform the market consistently - and the reason why i have posted here is to try and find flaws in this so i can go back and tweak it until i have something which works well.

Other than a market crash, when will you exit? Are you planning to "hold" this until year x when you retire or something.
and I mentioned earlier on two occasions where your scenario 3 has occured. In a short space of 3 years your market crash scenario has happened resulting in heavy losses
I get that there are potential gains, but these gains may never actually be realised unless you have a way of exiting the market other than a stop loss.