Worst Investment Strategy Ever
Do you make bad decisions when your portfolio goes down? What if there was a way to automate the decision so that your emotions wouldn’t get in the way. Good news, I found a way!
Here is the strategy, every time stocks drop five percent, you sell and wait for “clarity.” Why would you voluntarily ride out volatility, right? And here is the best part, you don’t get back in until things have stabilized. Repurchase stocks when they are one percent higher than when you sold, just to make sure that the dust has settled. Better be safe than sorry right? Here is what that strategy has looked like since the inception of the S&P 500.
Alright so you didn’t beat the buy and hold investors but you did compound your money at 2.8% with less than a ten percent annualized standard deviation. This is just slightly worse than what the average investor (WSJ article by Jason Zweig) has historically earned, but after adjusting for risk this looks like a great alternative.
End sarcasm <GO>
If you want to suppress volatility it’s likely you’ll suppress your returns as well, it’s just that simple. Here is an idea- if you are uncomfortable with equities, pick a different asset class. Notably, five year treasury notes have compounded at 6.6% a year since 1957 with an annualized standard deviation of just five percent. Unless you’re looking for an equity strategy with bond-like returns, you might want to rethink jumping in and out every time the market takes a dip.