Just read this article on Morningstar about the likelihood of a sideways market over the next 5+ years. Basically, the author, a senior vice-president at Legg Mason (fancy title for being a “chief salesman”) think we’ll likely be in a sideways stock market where momentum investing won’t work very well and value stock picking will.
Isn’t your system basically a momentum style of investing? In a sideways market wouldn’t your system keep invested in instruments that didn’t go up (due to sideways market) and didn’t go down more than the 7% sell point as opposed to looking for investment managers who were value stock pickers?
My view is somewhat different. While I agree that we’ll be in some sort of a sideways market, my definition is not as narrow as yours. As I have posted before, I think the market pattern will be more “w” like as we move into and out of recessions once the stimulus programs exhaust themselves.
I believe that the sideways pattern will be much wider than bouncing around the unchanged line by a few percentage points. I think it is far more likely that we will see sharp rebound rallies followed by mind numbing drops; but when all is said and done, the buy and holder will end up very likely with not much to show for.
And that includes value investors as well. After all, value investing is nothing more than an attempt to buy stocks at lower levels and hope for a rally. If the bear strikes, value investors will get clobbered just as anyone else with market exposure. Remember 2008? Only cash was king.
However, if the sideways pattern turns out to be as narrow as you suggest, that will offer a great opportunity to invest in income producing funds/ETFs, because the lack of volatility will keep your principal intact. Personally, I’d like that scenario as well, because I could invest in a high yielding fund like JNK and simply collect the 12% dividend without much downside risk.
Chances are that we will end up with a scenario that is in between. However, I am convinced that somewhere within the next few years (maybe even in 2010) another heavy hit to the downside will occur. That’s the moment where it pays to have insurance via a trend tracking safety net along with a strict exit strategy.
Disclosure: We currently have positions in the funds discussed above.