Article #548) A few lessons in this 15 month stretch of no S&P 500 progress

Updated: Nov 3, 2020

VTS Community,

Markets are up again today and hovering around a rather important level.  Not the level just yet, but getting there.  I'm still of the mind set that it may be a challenge getting over the all time high mark.  Might need some actual good news rather than just a smoke and mirrors show of Fed pumping and trade resolution teasers, but only time will tell on that one.

Around 2873 on the S&P 500 was where the market was a year and some change ago back on January 26th, 2018.  We find ourselves testing that level now.  There's a few lessons in this 15 month period I feel are worth noting.

1)  Buy and hold investing is dead, if it was ever alive to begin with.  Considering the vast majority of the investing world is still of the "buy and hold" mindset, I would hope the last 15 months since the beginning of 2018 has demonstrated quite clearly the short comings of that kind of approach.  Now we haven't even seen a recession yet so this argument will only get stronger going forward, but the buy and hold approach does spend an awful lot of it's time spinning wheels and not making any forward progress.  Remember, both after the dot com crash in 2000 and the financial crisis which really started in 2007, the S&P in both cases spent many years underwater for buy and hold investors. 

Tactical investing and being nimble enough to exit positions in a timely fashion is the only solution to the problem.  It's the only way to make sure that investing isn't perpetually a two steps forward and one step back process.  And in the case of buy and hold investing, it's sometimes a two or three steps back situation.  

I do wish more of the investing world would embrace tactical investing, but at least the VTS community got the memo  :)

2)  Drawdown reduction has to be the top priority for investors.  It is far more beneficial to forgo some of the upside in order to also skip over some of the downside.  Over short term periods of time it may not always seem that way, but in the long run reducing drawdowns is by far the best way to increase rate of return.  And again, this argument will only get stronger with time as we are now 10 years into arguably the longest bull market in history.  But as this last 15 months has shown, significant drawdowns happen, and it's best to try to avoid them.

My rate of return last year wasn't anything to write home about at 6.21%.  Now given that over 90% of assets globally were negative, I still beat the benchmarks by over 10%.  But still, the absolute rate of return was below my long-term average of around 22%.  But interestingly, one of the best achievements of my investing career happened to also be last year.  Despite the markets seeing two major drawdowns  (Feb & Q4)  I managed to keep my maximum drawdown to no more than -1%.  My positive return in a negative year didn't come from chasing big gains.  It came from reducing losses to a very manageable level. In a volatile year that saw a greater than -20% decline in the S&P 500, my -0.99% max drawdown was a win in my books.

Warren Buffett has been famously quoted saying: "Rule #1, never lose money.  Rule #2, never forget rule #1."  Well, the guy isn't wrong!

3)  Emotional capital is just as important as financial capital.  Emotional capital with respect to investing is the amount of positive mental energy all of us investors carry.  It's what allows us to make good decisions in difficult moments.  It's also what gives us the freedom to allocate hard earned money to markets that do have risk, and still be able to manage our day to day routines and embrace life.  It's a terrible feeling being weighed down by financial stress over investments that are high one year and gut wrenchingly down the next.

We have to be very careful not to burn through it and let it get to levels where it affects our lives. Investing takes place over multiple decades, it's a very slow and steady process.  Preserving our emotional capital by reducing drawdowns, diversifying investments, and maintaining a reasonable level of stability in rate of return are vital.

People pay me money for investing education, and to help them get a market beating rate of return.  I take that job seriously and always try to deliver on that.  But don't underestimate the importance of stability of returns either.  Life is too short and fragile to be worrying about our money.  Stability, and preserving emotional capital is what allows us to live free and happy rather than stressed, and may just be the most important aspect of the 30+ year investing process.

Daily trade signals are below, but on a related subject:

Daily Trade Signals: (Apr 3, 2019) No new trades today

VTS Tactical Balanced Strategy:

-  Currently Long MDY Stocks    (since Mar 28, 2019)

Today's Signal:  NO NEW TRADE

Maintain current MDY position

----------------------------------------------------------------------------------------- Choose the volatility strategy that matches your risk tolerance -----------------------------------------------------------------------------------------

VTS Conservative Vol Strategy:

*  Volatility Strategy for investors with lower risk tolerance

-  Currently Long ZIV     (since Apr 1, 2019)

Today's Signal:  NO NEW TRADE

Maintain current ZIV position

VTS Aggressive Vol Strategy:

*  Volatility strategy for investors with higher risk tolerance

-  Currently Long SVXY     (since Mar 11, 2019)

Today's Signal:  NO NEW TRADE

Maintain current SVXY position

VTS Tactical Volatility Strategy:

*  Volatility strategy using stock replacement through options

-  Currently Long VXXB Puts     (since Mar 28, 2018)

Today's Signal:  NO NEW TRADE

Maintain current 21 June 19' VXXB 40.00 Put position

* remember 1 option contract per 3000$ of available capital

-------------------------------------------------------------------------------------- Feel free to use a paper trade account to learn about options --------------------------------------------------------------------------------------

VTS Discretionary Strategy:

25,000 Model Portfolio reset annually   (current:  25,087.37)

-  Currently in 3 positions

Today's Signal:  NO NEW TRADE

Maintain current position #37 Maintain current position #39 Maintain current position #40

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