What matters, though, is not whether you manage to eke out that last few percent as stocks reach new highs, bailing out at the exact top.... for only liars do this.... but whether the reward you get for being in stocks is worth the risk taken. Specifically, if you are fully invested in stocks but you are not able to beat the return of a good money-market investment, then you are taking undue risk (or maybe, just having a whale of a good time even though you aren't making much money).
My caution began in December 1992, when I switched my pension funds out of stocks; and in the March 1993 issue of The Contrarian's View I declared, for only the third time in ten years of publication, A MAJOR TOP in the stock market, with a bear market likely to begin by July 1993. My first publication of this headline, in July 1987, preceded by only a month the August top before the 1987 Crash; and a repeat in July 1989 was only three months prior to the October high and subsequent minicrash, followed by (for the Dow, a secondary high in January 1990 and) the 1990 bear market. So it would appear that my March 1993 call was a bit premature.... at least ten months if you believe, as I do, that a bear market began in February 1994; or more than two years if you believe that we are still in a bull market.
Before you write me off as an armageddoniac (someone who believes the end of the world is near), or maybe as just plain wrong, let's take a look at the record. My comment in 1993 was that, even if the bull market were not immediately ending, we were close enough to the eventual top that "Timer's Trend" would mostly generate whipsaws, and that one would do just about as well by staying in cash. My assessment of "Timer's Trend" turned out to be correct; it was only marginally more profitable than "cash". But 1993 was one of those few years when a buy-and-hold strategy worked best, outdistancing both "cash" and virtually every market-timing system ever devised.
In February 1994, following the frenzied January highs and with the ratcheting-up of interest rates by the Federal Reserve, I said the bear market was finally underway. This turned out (in my opinon) to be accurate, for while the Dow finished the year with a slight gain, most averages were off for the year, and many investors in the more highflying mutual funds had double-digit percentage losses for the year. Meanwhile, the yield on "cash" continued to rise throughout the year, ending the year at almost 6%.... where it is today.
So, any analysis of the return from the "bull" market in stocks must be made against "cash" (money-market funds), the safest of alternatives. If you peruse the two charts that follow, the five-year records of the DJIA (below) and of the S&P 500 (page 3), which I obtained over the Internet from the Security APL web server, you can see that 1994 was mostly whipsaw city, with (on balance) the averages having gone nowhere. The Dow was up about 2.1% for the year; with the dividend yield added in, the return for the year was about 4.9%, compared to a total 1994 return from "cash" of about 4%.
For the S&P 500, the numbers are not as favorable; after adding in dividends, the 1994 return was about 1.6%.... and this may more closely reflect what actually happened to your own portfolio.
This year is a different story so far. Apparently, because stocks.... unlike bonds, derivatives, the dollar, and emerging-country markets, all of which tanked in 1994.... have yet to suffer the effects of bad news, neophyte investor are still pouring in gobs of money, driving the popular averages (but not the average investor's portfolio) to new highs. If you had been fully invested in the Dow in 1995, at a recent high of 4150 you would have made about 10.9%.... for a compound annual rate of return of 58.2%!, if the trend were to persist. That looks pretty good when compared to a 6% return on "cash", and it's periods like this that make ex-perienced and therefore cautious gurus like me appear to be total idiots.
But, the year ain't over yet. As in 1994, I still think "cash" will come out ahead for the year 1995. By year's end, we'll see if I still look like a total idiot.
Conservative: A statesman who is enamored of existing evils, as distinguished from a liberal, who wish-es to replace them with others. - Ambrose Bierce
What can be more frustrating than to be "right", but not be able to make money on it? In January I (correctly) surmised that U.S. stocks would benefit from a "flight to quality" as a result of the Mexican peso crisis and a general disenchantment with international investing, and that the Dow might well go to new highs. But unfortunately for me.... and for you, my dear readers.... the new highs in the popular averages are not matched by strength in the number of advancing over declining stocks, on which "Timer's Trend" is based. (For example, on March 22 the more sensitive 10% exponential gave a "sell" signal as the Dow was nudging its all-time high!) My own foray into stocks, switching my pension funds in January according to "Timer's Trend", yielded only a whipsaw; and "Timer's Trend" has generated only whipsaws or miniscule profits since (present signal excepted, as we are still on a BUY for which the corresponding sell has not yet arrived).
Although I suggested on the "computer warmline" that the current BUY signal might be playable, I just didn't have the stomach to again risk my pension funds in what is clearly an extremely high-risk stock market. This is a case where you should apply the "age rule"; if you're young, take chances and play the signals, because you have many years to make up for the rare cases where they don't work for you; but if, as I am, you are approaching retirement, then make sure you act to preserve the hopefully-considerable capital you have already built up.
The stocks making up the averages appear to have taken on a life of their own, soaring well above the price levels of most stocks in what is probably a computer-fed frenzy. Of course, there is a reason for the surge.... the Federal Reserve has goosed the money supply to supply liquidity during the Mexican economic crisis and our bailout of the peso, and the first place the excesss liquidity will appear is in the financial markets.... which is what the Fed intended. But this has created a dichotomy; the broad market (translation: your portfolio) is not following the weighted averages to new highs, and this "thinness" in stocks is reminiscent of the lateness of the rise in blue-chip stocks preceding the 1970 bear market, or of the "Nifty Fifty" silliness that preceded the 1973-74 bear; or of the last 400 points tacked onto the Dow before the 1987 Crash.
History shows that the eventual outcomes of previous dichotomies are not good for stocks. The bear in 1970 was the first major bear market since World War II, and ushered in an entire decade of mediocre stock performance. The 1973-74 "granddaddy" bear market was the worst since the Depression (P/Es of 3 and 4 were common-place); and the 1987 perfomance by the Dow ended in a swan dive.... the Crash. So while, as in 1987, it would be stupid of me to predict just how high the Dow can go, I can virtually guarantee it will end badly.... especially when, similar to 1987, the Mexican situation will have stabilized and the Fed withdraws the excess liquidity it provided to see us through the crisis. Really, 6% on money-market funds isn't bad when you consider the currently extraordinarily-high risk of being fully invested in stocks. Unless you are young, don't be a fool who tries to pick off the exact market top. (The young are entitled to be foolish.... they learn that way.)
CREF Pension plan; I switch between indexed stock/bond/money funds:
16Jan95, sold MM @ 14.83, bought equity-index @ 26.44
20Jan95, sold eq-index @ 26.19, bought MM @ 14.84
Values, 27Mar95: stock, 74.52; eq-idx, 28.27; MM, 15.01
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%;
1993: 3.08%
Gain, January 1 through December 31, 1994: 4.06%
Total gain since January 1, 1988 (7 years): 122.94%
Compound annual rate of return: 12.14% (My
long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 122.54%, for a compound annual rate of return of 12.11%.
COMMENT on Timer's Trend: Currently "Timer's Trend" is on a "buy" signal.... so far, a good one. Young folks are, maybe, in stocks following the signal; we old fogies will sit this out.
NEXT ISSUE - will appear about April 24. /Nick Chase