Why Trade Your Thrift Savings
Published: Nov. 22, 2001; (Updated: March 20, 2004)
During the 1980s and 90s, the buy-and-hold strategy of investing was a great way to build your savings. But, over the past few
years, we have come to realize that market dynamics have changed once again. And , it is our belief that the buy-and-hold days
are over for the next few years.
To start, let's take historical data
and construct a yearly linear chart of the Dow Jones Industrial Average (DJIA) all the way back to the beginning of the 20th Century
up to year 2004 (chart below). Looking at this chart, we see the stock market going ballistic ever since the early 1980s. If one
didn't know anything about the history of the market before this time, one could easily assume it didn't appear to be doing much
of anything. But it did. The market had a vast history of painful times as well as prosperous times.
When we reconstruct the data into a yearly logarithmic chart (log chart), things begin the pop out and become a little more
clear. Percentage charts work just as well to accurately present stock history. Here is the same period in a log chart.
Now, let's get down to the nitty gritty by annotating parts of this chart. Let's also lump the chart into bad times and good times.
The bad times were those periods when the market was caught in a long-term trading zone. During these years, it was much better
to trade your savings, since the buy-and-hold strategy of investing produced next to nothing in terms of growth. The good times
occurred when the market was caught in an uptrend. During these years, it was advantageous to be part of the buy-and-hold
strategy. Meaning, sit back and let the good times roll.
Bad Times: Two rather devastating periods can be seen. The first one was during the Great Depression when there
was a significant drop in the market from September 1929 through July 1932. During this time, the Dow lost 90% of it's value.
Another painful period was during the collapse of the market in 1973 and 1974. One may ask, what about the crash of 1987? Didn't
the market significantly decline during that year? Yes, it did. But, the chart is a yearly chart. Meaning, we used only one data point
per year (i.e., the value for the last trading day of each year). Since the buy-and-hold strategy was in full force during the 80s and
90s, by the end of December 87', the market actually closed higher that year then when it started in January. The year 1987 was
unbelievably a profitable year! That's the reason why this crash did not even show up on the chart.
Were there other bad times in the markets? Yes. Looking at the history of the market, we see there were periods
when the market practically went nowhere for years, even sometimes decades. We will label these periods as "Trading Zones". This
is because if one would have invested in mutual funds or solid blue chip growth stocks or components of the Dow Jones, the
buy-and-hold strategy would have done hardly anything in terms of growth over these long periods of time.
How long of periods are we talking? How does over 40 years sound? From 1900 through 1941, the Dow Jones only
increased at a rate of return of about 1.8% per year. Another stagnant period was from about 1963 through 1982 (20 years),
when the Dow Jones industrials only increased at a rate of about 2.5% per year. These are the dangers of buy-and-hold investing.
We invite you to read more about these dangers and the history of the stock market in our article,
Is "Buy & Hold" The Only Investment Solution? Now lets look at the
flip side of the coin, the good times.
Good Times: There were two intervals when the buy-and-hold strategy worked rather nicely. One period was from
about 1942 through 1962 (21 years), when the DJIA had a rate of return of about 9.0%, and another from 1983 to March
2000 (about 18 years), having a 13.7% rate of return. Yes, those were super times to ride the mutual fund wave or buy-and-hold
Where are we now? As we all know by now, the market has recently been through hell! We won't go into details,
but the majority of investors during 2000 through 2002 probably took a sizeable hit in their portfolio. Many people say the worst is
behind us. But is it? As labeled on the chart, we believe we are still in the initial stages of a new major trading zone. No one can
predict the length of time this zone will last. But based on past history, we are pretty sure it will be a while before the buy-and-hold
strategy is the best way to go. History tells us that investors will probably "not" make money with the buy-and-hold strategy of
investing for many years to come.
What are we to do as investors? It is our opinion that we have to become better traders in the market in order to
make our money grow for the next few years. And, until this market breaks out of this trading zone, which may not be for another
10 to 15 years, we strongly believe it is best to trade our savings.
How am I supposed to beat the market and make my savings grow during this long trading period? This is where
we come into the picture. We invite you to review Our Returns using our
We hope this information better informs site visitors and members of our position or philosophy of the stock market. Our primary
goal is to help our members move their money forward! We welcome you to join now!
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