After When, then What and How Much?

When: This Newsletter answers the difficult question of when to Buy and when to Sell, with results that are both verified and superior to a Buy and Hold strategy. You will not find many other Newsletters or websites that can make that claim and back it up. But the next logical question is “now what do I do with it?”

What: Because market timing as espoused in this Newsletter is concerned with the Major American Markets, the most appropriate investment vehicles are Index mutual funds or the exchange traded index funds (ETFs) that track the S&P 500 (Spiders), the Dow Jones Industrial Averages (Diamonds), or the new New York Stock Exchange i-shares Trust (yet to be nick-named, but I have a suggestion: How about ‘Apples’ for its symbol NYC, the ‘big apple’?). Spiders (SPY) derive their name from “Standard & Poor’s Depositary Receipts” and are American Stock Exchange traded securities created to track the performance of the S&P 500 Composite Stock Price Index. They trade like stocks and the dividends are distributed quarterly equivalent to the dividends paid by the underlying stocks in the unit investment trust, less annual fees of about 0.18%. Diamonds (DIA) are similar but track the Dow Jones Industrial Average, which is why they are called ‘Index shares on the Dow’. The New York Stock Exchange Composite i-shares (NYC) track the entire New York market. While a commission must be paid to buy or sell, the advantage over Index mutual funds is that they can be bought or sold during and after the normal trading day, not just at the closing price as mutual funds are.  I can not emphasize this advantage enough, as you will find when a Buy or Sell Signal is communicated during a trading day. To be able to get the current price (usually near net asset value) rather than what it might happen to be at the end of the day could be a significant difference.  Also the advantage of being able to trade after market hours can be important. They are marginable, and can be sold short without the need for an ‘uptick’ in price.  In a word, they are as close to the ideal vehicle for utilizing market timing as exists. Of course they go up and down, and money can be lost if they are sold at a lower level than purchased. A Prospectus is available on each and will clarify the above or any other questions that you may have: ASE, 86 Trinity Place, New York NY 10006.

     Other more aggressive exchange-traded funds (there are over 150 ETF’s), regular mutual funds (of which there are some 14,000!) or individual stocks can be utilized in an attempt to outperform the ‘averages’ but choosing which ones is a whole other subject that I’ll leave to others to figure out.  Individual stocks may perform well, of course, or they may end up like many well known ‘quality’ stocks have in the past few years: Lucent Technologies dropped from $70 to $3, K-Mart from $20 to $1, Rite-Aid from $50 to $2, Enron from $90 to 50c, Sunbeam from $50 to 5c, Polaroid from $60 to 8c, Montgomery Ward disappeared, etc, etc, etc. The safest way to invest is to diversify, diversify and diversify.   The surest way to track the market as a whole is with widely diversified index funds as I’ve described above.

     Does it matter which you use? Long term studies have shown that the Standard & Poor’s 500 stock index and the Dow Jones Industrials have grown at annual rates within ½% of one another. During the 1980’s the Dow grew 228.25% while the S&P grew 227.40%, during the 90’s the Dow grew 317.59% vs. 315.40% for the S&P (less than a 1% difference over 10 years). The NYSE Composite Index parallels those results and therefore all three indices are good benchmarks and hard for money managers to ‘outperform’ because they are not static. From time to time ‘new’ stocks are inserted for those that are delisted or deemed no longer representative, thus its performance is often enhanced by these adjustments.   In the late ’90’s, the advantage was greater for the S&P because of more computer, Internet, and technology related stocks that it holds among it’s 500 stock ‘portfolio’, than are included in the Dow Jones 30 stocks. That is not to say that the Dow Jones cannot and will not outperform the S&P over any interim period, in fact that is exactly what happened in 1999 when the Dow gained 25.2% while the S&P only gained 19.5%, almost the opposite of 1998 when the S&P gained 26.7% and the Dow gained 16.1%. From 1999’s year-end to 2002 year-end all lost ground with the NYSE and Dow losing less than the S&P.  These differing results are the very reason I suggest investing in each, in order to obtain an average that is midway between the three. Since there is no way of knowing for sure, a year ahead of time, which index will perform the best in the next year, a combination of Spiders, Diamonds and the NYSE Composite will assure full participation in the markets move. That way you will always outperform one or two of the indices.

Since investing in the NYSE may be challenging, another option is to buy the S&P500 equal weight ETF (RSP), which gives a balanced exposure to 500 stocks and, over time, tends to outperform the SPY, and it provides an extra layer of diversification to our Composite.

Furthemore, I have added to the original mix (SPY, DIA, RSP) the QQQ (Nasdaq 100 ETF). Why did I include QQQ? For the reasons explained in our March 1st, 2022, Letter.

How much you invest is an individual situation. When I recommend ‘fully invested’, that would usually be near totally invested with those funds which are earmarked for investment. Perhaps you always keep 5 or 10% in cash ‘just in case’, and that is fine. An aggressive pension fund would probably only go to 80% maximum, with 5 or10% in cash, and 10 to 15% in bonds. Incidentally, the ‘robot blend’ for asset allocation is always at 55% stocks, 35% bonds, and 10% cash, and that almost always beats the performance of the major brokerage firms recommended blends.

     When we get a Sell signal, if you are a very aggressive investor you would sell most of what you hold with the possible exception of low cost ‘core’ holdings. An institution would seldom sell as much as 50% of its portfolio, and that is probably true for most serious long term investors. The ‘cash’ portion should be held in money market funds, short-term Certificates of Deposit, Treasury notes, and the like. If we are getting a partial signal, as happened in 1998, and suggested selling half, and later all, and then reversed that with buying half and then all, you would simply adjust that to your personal range of from 100% to zero, or 80% down to 50%. We do not recommend selling short in this Letter because that is not appropriate for many readers. Selling short ‘against the box’ is appropriate for many investors with low cost ‘core’ holdings as a hedge against a falling market. In that case you keep your original stock position but sell some offsetting shares short, therefore what you ‘lose’ from the markets highs on your underlying stock you hopefully will gain on your short sales. Then when it is time to buy you simply ‘cover’ the short position and continue on with your holding of your original stock without any tax consequence. The short gain is of course taxed at short term rates. For tax advice you should talk to your tax advisor.

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