Hello Jim/Group,
Good questions and a good discussion. I took a jab at each question, so sorry for the long response. Jim's questions:
1) Has anyone who makes 100% moves between TSP Funds back-checked any strategies like these to compare how they perform to buy and hold, especially during sideways and bear markets?
Jim, I have back-tested many indicators. Some do well in a trending market and some in an oscillating market. And I find you only really need one for oscillating markets and one for trending markets. The problem is the market tends to switch back and forth and the pattern and the duration changes. In other words, is it is difficult to find an indicator-based strategy for all markets.
I have come to believe that most of the financial data, analysis, and software trading tools (tracking 350+ technical indicators) are designed to make young investors overconfident. Then winning early or in bull markets seems to make investors believe they can make a comeback after a big loss (same with casinos). Since the market spends 80% of the time in bull mode, this effect naturally occurs and is evidenced by the fact that retail investors are the most exposed to stocks at market tops and least exposed at the bottoms.
I have a degree in investment finance and I had to learn the hard way. After starting strong, I got beat up in the tactical investing arena. Today's market is much worse with high frequency trading companies that *never* have a losing day investing - or are they skimming. Good luck beating Wall Street's algorithms if you trade often. But after a long search I did find one simple strategy that works well in both bull and bear markets.
2) But, aren't there other approaches using only one or two trades per year that might do even better over a multiple year time frame?
Well, you obviously struck a chord with me since my adopted core strategy only requires two trades a year…
Five years ago, I subscribed to Mark Hulbert's research on professional market timers and studied their performance in bull and bear markets. What Mark found was that few timers did well in both bull and bear markets. The leaders during bull markets did terrible in bear markets – they were not much better than retail investors. Of hundreds of timers only a handful did well in both markets and most of their strategies could not be applied to index fund investing.
Then I found a gentleman named Sy Harding. Sy came up with an improved Sell-in-May strategy and Mark Hulbert often wrote about it. I studied and improved upon Sy's strategy so I could apply it to the TSP funds. The TSP S fund had the most impressive results due to the greater seasonal tendencies of small cap stocks. (Sy applied his strategy to the Dow Jones Industrial Averages)
I found that employing this seasonally-modified buy & hold strategy that only holds equities during the favorable months improved long-term returns because it reduced exposure during the time of the year that sees the largest corrections and bear market losses. For some it seems too simple to believe, but it has worked looking back 30 years, 60 years for the SP500 (TSP C fund) and even 300 years in England's stock market. And since it is a mechanical strategy it eliminates emotional decision-making.
Sy Harding's Seasonal Timing Strategy had a 16-year real-world award winning track record. Sy let his seasonal timing strategy run during bear markets and what I found in testing was most of the deep bear market losses did occur during the unfavorable six months of the year. BTW, his seasonal strategy outperformed his own award winning technically-driven timing in the long run.
I use a modified strategy for the TSP funds as my "core" strategy. But it was also self-evident that avoiding bear market losses further was an additional way to improve on the strategy and reduce stress. This led to me "override" my seasonal strategy this October and not re-enter equities based on my cyclical indicators (which so far has proven the right thing to do).
3) Jim asks, "What is the TSP Strategy Group's Strategy"
First of all, I also find Sarah to be a great group leader and very fair in her responses and to include my own since I often offer differing opinions. The forum she provides to share information is valuable and this alone is a good strategy. Bear markets are very stressful and so it is normal to see anxiety within the group.
I did find something from the group's past returns that may be pertinent today. If the information is correct, it appears the group bought & held the TSP I fund from 2006 - 2010 (all the way through the bear market). If this is true, I am guessing the group got trapped (like a lot of people) not wanting to "lock in losses" on the way down that then this turned into a strategy of buy & hold since the market "always bounces back".
I bring this up because the group appears to be back to this situation and many are looking for that bounce or rally to sell into. Unfortunately you are not alone and all the small rallies are being sold into so far. In other words, you may or may not get that chance to sell and it will be harder to sell later if the market falls further. If you are fully invested you have some tough decisions to make very soon which brings me to Jim's final question.
4) Is there an exit strategy or a new upper level we're looking for on a bounce to either lock in gains or cut losses and move to a safer or more promising fund? If not, how different is this from a buy and hold strategy?
Since I am of the opinion the S fund will see a decline of more than 50% from its peak during this bear market, I think it helps to see selling as locking in some of your gains - preserving capital - vices locking in losses.
If you are stuck 100% invested you might find it easier to sell half now and if the market rallies, you can sell more into the rally. If the market falls further, you only lose half as much going forward. This is an option I am telling my new subscribers or those who did not follow our Sell-into-Strength advice last spring. Simply put, you need to spend most of the bear market 100% out of equity funds.
I do hope we get a strong rally to sell into, but I do not base investing on hope. Yes the market is trying to put in a floor now (27 January) and had the benefit of the FOMC meeting bounce (can't have the market tanking when the Fed meets) and will have the end-of-month support on Friday when part of monthly paychecks flow into retirement accounts invested in the market. Maybe the bounce will be enough for the market to get a short squeeze as the shorts are force to buy to cover....
...that's a lot of maybes and simply adds to the daily noise. The truth is that it is not a healthy market and during bears, markets can become oversold and dive deeper into oversold territory. Market internals remain weak and investor aversion to holding risk continues to grow. And I believe many Wall Street deal makers are positioned for the market to fall - but they won't tell you that. Others on Wall Street are begging the Fed for more monetary easing like drug addicts begging for another fix. This tells us about the state of the markets. Watch out below when SP500 approaches 1860 again.
PS. When I was researching the dedicated TSP timing services, I built spreadsheets about the services. I decided to pretty it up and post this basic review of TSP timing services for the TSP Strategy Group. Let me know if it is useful or if I need to make corrections. If someone has a better strategy, I am all for it. Just don't ride this bear to the bottom.
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Posted by: Michael Bond <michaelhbond@yahoo.com>
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Neither the TSP Strategy group, nor individual members, are licensed or authorized to provide investment advice. Any statements made herein merely reflect the personal opinions of the individual group member. Please make your own investment decisions based upon your personal circumstances.
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