Have you heard the following statements from your financial planner,
mutual fund advisor, or stock broker?
- In the long term the market rises 8% per year.
- Investors cannot time the market. The best strategy
for investing is to buy and hold for the long term.
How many decades does the "buy and hold" investor have to wait
to get their 8% per year return from the Dow Jones Industrial Average?
This is what a chart of the Dow Jones looks like for nearly the past nine
years.
How many years (or decades) of holding an investment is considered
"long term"? The above chart illustrates that the "buy and
hold investor" that entered the market in the year 2000 would have made
a negative 23% total return on their money by October 9, 2008. Keep in mind
that this return does not factor inflation into the equation. Since the year
2000 how much more does it cost to buy food, get an education, heat your
home, get medical treatment, buy gas for your car etc.? The "buy and
hold" investor has done significantly worse when factoring in the
effects of inflation into their investment returns.
When comparing the Dow Jones directly to another asset such as gold, we
bypass the distortion of the fluctuating US dollar measuring stick. The
following chart illustrates the performance of the Dow Jones when priced in
gold.
In this chart we can see how much the Dow Jones has fallen in value
relative to gold, and conversely how much gold has risen relative to the Dow
Jones. In the year 2000 it took roughly 40 ounces of gold to buy one share of
the Dow Jones industrial average. Today it takes roughly 10 ounces of gold to
buy one share of the Dow Jones. In other words, relative to gold, the Dow
Jones has lost roughly 75.5% of its value.
We are not suggesting that the average investor try to time the market on
a day to day basis. Instead we are trying to illustrate why we attempt to
time the "big picture" of large shifts of capital from overvalued
asset classes to undervalued asset classes. We believe that timing these
large, multi decade cycles may be the most important investing strategy an
investor could follow. These long term "mega trends" are where
significant profit is made as the rising tide of the bull market raises all
boats.
A good example of these shifts of capital is seen from the 1960's to 1980
when investors fled paper assets such as stocks and bonds in favor of hard
assets such as gold and silver, but because markets are cyclical and not
linear that same money flew out of hard assets and into paper assets from
1980 to 2000. In our opinion the large cyclical transfer from paper assets to
hard assets started once again in 2000 until present. We believe investors
are losing faith in paper assets and are once again in the process of
transferring their money into the security of hard assets.
Markets are cyclical and one day the sun will shine brightly on financial
stocks, technology stocks and the like again. But in our opinion this recent
drop in the paper markets is not a simple pull back and "buying
opportunity". Instead we believe this "correction" is a full
blown "crash" that will take many years to recover from. Make no
mistake that when the news of falling massive, financial corporation's no
longer shocks the average investor because it has become so common place, a
significant consequence is likely hiding around the corner. It is during
times like this that we look for assets the world "needs" instead
of assets the world "wants".
At www.investmentscore.com we
do not know exactly when a market will crash, bottom, or even explode higher.
But we use long term, big picture charts to help guide us in making long term
investment decisions. Currently we are long term precious metals bulls and we
expect spectacular returns in the coming years. But the key to profiting in
any market is not only knowing when to buy but also when to sell. To learn
more about our approach to investing and to sign up for our free newsletter
please visit us at www.investmentscore.com.
