It is now well understood that buying and holding generic exchange-traded stocks for the long term has not worked for some time. Since January 20, 1997, fourteen years, the Vanguard SP500 fund's total return with dividends reinvested was a very modest 5.42% per year while the Vanguard Total Bond Market fund returned 6.02%. Starting the comparison from January 2000 was even more devastating for stocks, with the Vanguard SP500 fund returning only 0.92% annually. Currently stocks have been rising for a while while bonds are falling, therefore there's a possibility that this long ten to fourteen year period of stock under performance and bond over performance could see a reversal of fortunes. However, quite a few respected investors and managers feel this period of reduced stock returns may well persist for several or more years.
On the other hand many people made a lot of money in stocks over those ten or fourteen years by NOT buying and holding the same stocks for years. Doing this requires much study, work, and skill. Very few can make a million dollars out of ten thousand during their first year of trading, or ever. I won't go over all the methods of trading running the spectrum from basic fundamental analysis of individual stocks through many different methods of technical and sentiment analysis of markets. There is a long learning curve for most of these methods and much, much work. How about something that's easier, at least easier to understand for a novice?
Another reason for asking how to approach trading, besides the failure of buy and hold for the past ten to fourteen years, is that retired investors now face a daunting task of making enough income off their retirement funds due to extremely low interest rates. Also even if new retirees buy bonds now, a bond bear market would not be a pleasant experience for them. Famous investor Bill Fleckenstein, who tries to hold stocks for one to three years, recently observed that there really aren't any safe investments now. Everything we buy (or sell!) is a speculation given the loss of faith in the system, the massive intervention of governments and central banks, and artificially low interest rates.
Whether we are in the accumulation or growth period of investing or in the retirement draw-down phase, most of us are going to have to get involved in trading, one way or another. The laid-back way to do this is to find mutual funds with excellent records which have the legal (SEC charter) and proven historical ability to change the mix of asset classes as the markets change. Bob Carlson of Retirement Watch refers to them as "hedge fund mutuals". Heather Rux, a long time poster at this site, and I have also written about some of the same funds over the past few years. In my view three of the best are Hussman's Strategic Total Return Fund (HSTRX); PIMCO's All Asset-All Authority Fund (PAUIX or PAUDX), guided by Rob Arnott, the allocation master who can move around amongst almost any of PIMCO's excellent funds; and Oakmark's Equity and Income fund (OAKBX) which is a thinking person's balanced fund.Equal dollar amounts of the three funds would have returned 6.65% annually over the past five years with rather limited volatility in the most volatile period of modern investing. They have an almost identical record over the past seven years which is as long as all three have been trading. OAKBX has returned 11.37% annually over the past fifteen years. These "trading funds" are as close to "set and forget" as I can imagine.
HSTRX paid 1.25% in dividends in 2010 while PAUIX paid ~7% and OAKBX about 1%. So they are not "income funds" in any high yield sense, but at an average of 3% they would work for a taxable account as the "retirement conservative growth" part of an overall portfolio. All of these will be able to increase their yields as rates go up, but since they are not, by choice, holding long term (or extended duration) bonds, they will lose very little bond capital. All three managers are extremely good at bond selection in their funds. I should also mention that all three managers include some foreign stocks and there are currencies and commodities in the PIMCO and Hussman funds and other assets. If Oakmark is closed to new investors where you buy your funds, you can buy it directly from Oakmark or use FPACX which has a similar approach and yield and an even better fifteen year record than OAKBX. These three funds could do it all for some people and do it well.
This is a laid-back conservative growth and income "trading portfolio" whose managers do the trading for you at a far, far smaller cost than a hedge fund manager would demand. In two more blog posts I will try to put together a similarly "laid-back" higher income portfolio which is not too complex, and finally a way to do some trading without too much work for those who wish to try for more capital growth, whether in retirement or not.
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