How to play the next market cycle

This is more strategy that anything else and it will appeal to the buy and hold investor more than the trader – the aim of the game is to make money, the easiest way to do so is by being a Buy and Hold investor.

STOP – don’t get me wrong, I’ve slated B&H Investors in the past, with good reason, because there’s the right time to be a B&H Investor and there’s a wrong time.

What could be easier than Investing, monitoring and doing very little whilst your money explodes higher? Nothing, it’s the easiest way to make massive money, It is the cycle that breeds the “I’m an expert Investor” types – let me enlighten you, “expert” investors don’t lose money during bear markets! That’s when you know if you’ve got it or your a sham that got lucky riding a wave that only went up.

Think back to 1999, I can name handfuls of experts, some of them bricklayers, window cleaners and call centre operators who were Investment experts, Until the market cycle changed, the very same market cycle that they did not have a clue existed.

Today, I read somewhere, on a book cover I think about a UK prominent Investor who advocates the buy and hold strategy, through extensive company research and selection, then I read that he started out with £120k in 1982, turned it into £1 million in 2000, lost 40% of it in 2008 and so on.  Very impressive, actually money, actual returns and management of portfolio, you cannot know the overall outcome because he’s achieved what many of us set out to do.  BUT, although impressive, we need to examine what he’s done, by complete accident and without knowledge of market cycles:

  • In 1982 £120k was a massive amount of money
  • 1982 the 18 year bull market cycle started
  • He’s taken a 40% hit on a multi-million pound Investment portfolio in 2008 and the other years since 2000 weren’t that fantastic (the market cycle changed in 2000!)
  • So £1 million in 2000, starting at £120k 18 years prior = approx. 735% = 40.83% average annual gain
  • Impressive returns

Let’s now take a look at what would have happened if we’d of just bought the Dow Jones Index unit trust/tracker/ETF of the time with £120k in 1982 and sold in 2000, because we HAD knowledge that a 18 year upwards BULL market cycle should be on the cards – no skill, just buy and hold for the entire length of the assumed market cycle:

  • Dow level in 1982 = approx. 1000 points
  • Dow level in 2000 = approx. 11000 points
  • Gain = 10000 points approx. (you’d of never bought the low and sold at the highs)
  • = 1000% gain in 18 years = 55.55% annually on average
  • Includes the “shock”1987 crash, the other crashes in the 90’s
  • So let’s keep the maths simple and apply 1000% to our £120k = £1.32 million over 18 years

So just by buying and holding at the right times, we’ve beaten a system that someone has spent hours per week researching, tweaking and monitoring AND probably fretting about.  Just by buying and holding the Index at the right time you can replicate results out there and in some instances beat them.

What would you of done since 2000, when the market cycle changed? NOTHING, you’d have stayed out of the market in CASH – in all reality you’d of probably risked a little in 2003 and 2009 but it’s not necessary

What returns should you expect from the next market bull cycle – I’ll be looking for very similar % returns of 1000%+

Before we all get excited, the next bull cycle is still a few years away as yet!  So you’ll have to be patient.

A very basic strategy would be to go long the S&P500, Dow or Nasdaq or a combination split at the right time and just leave until the right time to sell, but rather than calling yourself an Investment Expert, just acknowledge that all you’re doing is exploiting and riding the market cycle rather than having super star abilities of picking fantastic stocks.

I have a smallish pension fund that I plan to use this idea on, this will be the ultimate set and forget, as my retirement date is smack back at the predicted start of the next major down turn.  I plan to go long in the IUSA ETF and the LUK2 ETF, equal split 50% each of my fund  on any of the following conditions:

  1. A 30-50% fall in the S&P500 during 2014 or
  2. A 15% fall during 2016 or
  3. I’ll take a long position in December 2016 regardless (unless already invested)

I’ll be doing the same for my children’s invested funds too – It’s now time to start thinking about being long, long, long the stock markets.  I’m perfectly happy to just sit in cash until December 2016 if the market does not comply with my demands.  This is potentially a 3 year wait, but I have my plan in hand and it will executed once the market is in position or time runs out.

I realise that this goes 180 degrees against what I’ve previously said about risk/money management – I’ll still be trading but with another account and to be honest in that other account I’ll be employing buy the pullbacks once a definite bull trend is established.

The pension fund is planned just to set and forget, if after I buy it falls 80%, so what, I’m happy to accept that risk as I can’t get at the money for a few decades anyway so it does not matter if it lingers for years underwater, at some point it will come back and if I get it wrong I’ll have to scramble to build it up in the 2020’s.  If the USA markets follow 200 years of historic price action, the markets will at some point be flying upwards – I think that point will start late 2016

In the meantime it’s still a traders market.

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