“Spanning the globe” was not just a saying from Jim McKay’s opening to ABC’s Wide World of Sports.  It is also what you should be doing when researching positions for your portfolio.  The U.S. still has plenty to offer an investor.   As for the rest of the world, well it should not be ignored or slighted.  At one time the rest of the world was not so interesting a story as the U.S.  That has changed and is still changing.

Losing weight

In 1970 the U.S. made up approximately 65% of the world’s total market value.  According to the World Federation of Exchanges (WEF), as association of the 51 largest stock exchanges around the world, as of April 2009 the U.S.’s total market value in the world sits at approximately 34%.  That is some significant weight loss.  If you do not believe their numbers, Forbes magazine conducts an annual survey of the world’s 2,000 largest companies and the results are more drastic.  Of the 2,000 largest companies in the world only 551 (27%) are in the U.S. That means the rest of the world makes up the other 73%.

Running for the door

The corporate diet the U.S. has been on is not a new fad.  The U.S. has been losing industries for decades.  Look where your clothes, appliances, and toys are made.  Making a mad dash to overhaul your portfolio would not be the worst idea.  The long-term growth prospects in the world are not in the U.S. they are overseas.

So, who has been gaining weight

Again, according to the WEF the world approximately breaks down by market value as follows:

• 34% – U.S.
• 24% – Europe
• 15% – Emerging Markets
• 9% – Japan
• 8% – China
• 4% – Pacific ex Japan
• 3% – Canada
• 2% – Australia
• 1% – Africa and Middle East

As the U.S. sheds market value weight (unfortunately not average weight of resident) the rest of the world is gaining.

In my last post, 2008: The Final nail for Buy and Hold, I referenced a common marketing piece that gets dragged out by the financial services industry when ever the stock markets get choppy.  The piece has many iterations over different periods of time and analyzes average annual performance of the S&P 500 if you bought and held the whole time and  the average annual returns had you missed the 10, 20, 30, 40 best days in that period of time.  What I showed in the last post was the other two stories – missing the worst days and then missing both the best and worst days.  The question is can you actually miss the best and worst days or get close?

You Can Get Close

If you did not read the last post, here is a best and worst day study from the beginning of 1984 through the end of 2008. If you would have bought and held the S&P 500 in this period of time you would have realized an average annual return of 7.06%. Now lets look at if you would have missed some days.

(Source: NAAIM, Inc., This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)

The Secret

So, the question is how would someone get close to missing the best and worst days thereby giving yourself a better shot at lower volatility with consistent returns.  The answer is simple buy when the S&P crossed above its 200 day exponential moving average (EMA) and sell when it fell below its 200 day EMA.  The 200 day EMA is a common technical analysis indicator of a healthy stock or ETF or an unhealthy stock or ETF.  You can chart the 200 day moving average in places like Yahoo stock charts for any stock, or ETF.

Here are some statistics using the the Vanguard Index 500 Fund (ticker VFINX) from the period 1/1/1985 to 3/9/2009 (yeah, I know I have an extra two years in my study versus the NAAIM study above but you will get the point):

WORST DAYS from 1/1/1985 to 3/9/2009

• 42 of the 50 worst days happened under the 200 day EMA (84%)
• 81 of the 100 worst days happened under the 200 day EMA (81%)
• 147 of the 200 worst days happened under the 200 day EMA (74%)

BEST DAYS from 1/1/1985 to 3/9/2009

• 45 of the 50 best days happened under the 200 day EMA (90%)
• 74 of the 100 best days happened under the 200 day EMA (74%)
• 123 of the 200 best days happened under the 200 day EMA (62%)

Conclusion here is that in one simple trading method you could have missed the majority of the best and worst days in the period of time referenced.  Consider the of the 200 best and worst days noted above it favors that you get more of the good days and less of the bad.  You can see this in the fact that you would have missed 74% of the worst days and only missed 62% of the best days.

Now you not only know the rest of the best and worst day story, you know a simple way to miss many of the really bad days in the market and still get some of the good days.

It did not take just one bad year [2008] to kill the buy and hold investment strategy.  The question is was it ever a viable option for managing money?  In the last ten years we have seen two 40% + drops in the stock market.  For a buy and hold investor, large market drops are hard to overcome both mathematically and emotionally by them self let alone twice in ten years.  The financial services industry and financial media would have you believe that there are no other options but to buy and hold. There a reason for wanting to perpetuate buy and hold as an investment strategy but it does not favor you.

Investing Reality

Buy and hold has been perpetuated as an investment strategy for so long because it is a money maker for everyone but you the investor.  How do I know that?  Who has made money in the last ten years?  The financial services industry,  your advisor, your broker, and mutual funds have all been paid.  These are all the same sources claiming buy and hold as an investment strategy.  What has buy and hold produced?  Consider that the S&P 500 stood at 1,228.10 on 1/4/1999 and on 12/31/2008 at 903.25.  That folks is a -26.45% drop over the ten year period.   If most funds do not beat their benchmark, as S&P studies have shown, than you may have done worse.

Defining Dirty Words

There are alternatives to buy and hold that your advisor will probably not bring up.  One of those alternatives being market timing.  Market timing is a dirty little phrase in the financial services world. Market timing is considered taboo mainly because buy and hold needs an opposite too look attractive against.   What most advisors do not tell you is they practice market timing on some level.  Market timing is attempting to predict where the market will be going based on some data or research.   So, when your advisor says I think or feel something or other he/she is timing the market.  They will not admit they are timing.  They will call it tactical or strategic something or other but now you know it is a form of timing.

Trend Following

Trend following, which I practice, is defined as an investment strategy that takes advantage of long-term positive and negative moves that play out in the financial markets. A trend following strategy will have a particular metric or a series of metrics that trigger buying and / or selling.  Trend following is not really market timing since you are not predicting anything rather buying and selling at predetermined points and it is certainly not buy and hold.

The Ongoing Lie

Let me clarify plainly, why the financial services industry keeps the buy and hold idea going.  It is the easiest way to have you leave your money in one place.  It is called “sticky” money.  Additionally, buy and hold is easy.  The advisor has to do very little work but they still bill as if they were doing something for you.  To keep the invest public trained on buying and holding the financial services industry (mutual fund companies to big brokerage firms) produce a very misleading marketing piece.  This piece is usually titled what if you miss the 10 best days in the market.  The piece usually outlines what your supposed detriment would be if you missed the 10, 20, 30, 40 best days in the market over a particular time period.  The point is to reinforce that you should stay invested all the time because you never know when those good days are going to come.  What they do not show is what if you miss the 10, 20, 30, 40 worst days in the market.  Or better yet what if you missed the best and worst days.

The Real Numbers

Here is a best and worst day study from the beginning of 1984 through the end of 2008.  If you would have bought and held the S&P 500 in this period of time you would have realized an average annual return of 7.06%.  Now lets look at if you would have missed some days.

(Source: NAAIM, Inc., This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)

What does this chart tell you?

• The option the financial services industry shows (missing best days) in their marketing material is the least desirable
• The most consistent option is missing best and worst
• Missing the worst days is best because losses are more powerful than gains

What the financial services industry will have you believe is no one can pick all of the best days or conversely avoid all of the worst days.  Right?? There are ways to miss a very large percent of the best and worst days.  Stay tuned to my next post where I will outline how to get as close as you can to missing the best and worst days in the market.