• Editor's Note
  • Editor's Note

    by Charles Rotblut, CFA

    Don’t panic.

    This is the advice I’m giving in this issue. Regardless of how turbulent the market becomes, don’t panic. When it seems every pundit is predicting a worsening of economic conditions, don’t panic. When you see your portfolio dropping in value, don’t panic.

    I could write a lengthy essay telling you not to panic, or I could show you how much wealth is forfeited by panic selling. Such an illustration would not pull data based on scenario analyses (e.g., Monte Carlo simulations), but rather it would use data from a portfolio an investor could have easily replicated and followed. I chose the latter based on conversations I have had with many people. The feedback I’ve heard is that while simulated data is nice, they would rather see what would have really happened over the last X number of years.

    So, I ran the numbers. First, I used the 26 years of data I now have from my rebalancing models. Then I looked to see what would have happened if an investor’s timing was terrible and he got into the market either near the top of the tech bubble (January 2000) or near the peak of the housing bubble (2007). The message using all three time periods was the same: Don’t panic.

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    Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


    Discussion

    Pete Stoehr from New York posted over 2 years ago:

    I did a study recently. over 20 years, there were only two times that the S&P did not recover within a few months (3-4 months, I think, possibly as much as 6 months) During those short recovery corrections, buy and hold was the optimal strategy.

    In the two serious corrections, the 50 day simple moving average of the S&P crossed the 200 day simple moving average. If the SPY was shorted at these times in proportion to the (Portfolio Value x Portfolio Beta), and the short was closed when the condition reversed (50 day SMA exceeded the 200 day) there would be no loss, and possibly a profit (often Beta downn is less than Beta up). In the two other instances of the "Golden Cross", as I remember, the correction was shorter, and the strategy would yield a net zero gain/loss.

    If you want an article on this I'd be happy to write one.


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