When the wind blows, you sail
This is The Model (scroll down for Excel Tables). Find out how it beat the market below & by signing up ->
You may also use the chat (...) to the bottom right,
for questions and we will try to respond in a timely fashion.
You may have found this page through a catchy headline such as
IN SEARCHING FOR REDUCED RISK, THIS MODEL BEAT THE SPX BY 104% FOR 93 YEARS AS OF 4/10/2020!!!
While true, there are a few other things you should know about this risk on / risk off model.
It is worth noting as we outline the ideas below:
Taking a loss can hurt you more than a gain. On $1, if you loose 50% you have $0.50, then off the $0.50 at 50% gain only gets you to $0.75. You need a 100% gain to get back to even at $1.
Any amount you saved getting out of the the 50% loss in a big win. You can even wait to see if things are getting better, before re-investing. That can then be re-invested for compounding returns.
What do you want to do with your cash when you have it? During the 2008 financial crisis you would have had cash for 644 days.
Maybe you could sell puts covered by your cash
The intent of The Model is to provide a dynamic entry and exit point for investing or speculating in the equities markets. This should be considered as 'Risk On' and 'Risk Off' in your financial life. The best way to invest is to buy and hold. However, if you want to have cash in bad times, or simply not take as much risk, then The Model can help. It's easier to make clear decisions when you have your money in cash. You could also make a less dynamic rule, such as any time the market goes down by -10% or more I sell, and any time the market goes up by +10% I buy. If so, you would have still done a good job of setting rules and getting cash when you need it.
The data is from the S&P500 (SPX) and goes back to 3/9/1927 and the start of the Great Depression. That's almost 100 years of data.
Subscribe with the button below for 'Risk On' or 'Risk Off' alerts generated by The Model via email. It is free.
More commentary below.
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While The Model would have beaten the SPX by 104% over the last 93 years (at time of writing in 2020). See highlights at bottom of above google sheets table for most recent. It also would have not maximized your paper revenue at times. However, holding onto that paper revenue can often mean taking and accepting significant risk / volatility.
One such paper miss period would have been as follows. Data available below.
12/18/2012 - You buy at $1,446.79 at the close
5/31/2019 - You sell at $2,752.06 at the close
Buy and hold gain of 90%
With The Model you had sold at 11/8/2012 and were holding cash. You enter and exit the same times. But gain a 50% return.
If you look at the data below, and use it for the last 20 years. You can do a quick calculation.
3/21/2000 - You buy at $1,493.87 at the close
2/28/2020 - You sell at $2,954.00 at the close
Buy and hold gain of 98%
The Model you had sold 2/18/2000 and were holding cash. You enter and exit the same times. But gain a 109% return.
You are also in a cash position as of 2/28/2020, and have avoided a loss of 6% since that date as of 4/9/2020 when the market closed at $2,789.32
To summarize, consider subscribing to the email alerts here, these will identify when you should evaluate being 'Risk Off' likely that means going into cash. Or 'Risk On', likely that means going into equities. If you like Ray Dalio's bubble indicator, or Nouriel Roubini's Boom Bust model, you will like my approach, which doesn't trigger very often and is closer to Ray Dalio's indicator.
This was put up quickly, but a simple graph of the last 20 years is here, along with associated buy and sell dates. Sometimes a visual helps. Notice 2008
Well, 2007 to 2009, and being 'Risk Off' for 644 days. Cash, for 644 days when you may have needed it.
Note: I am not an investment professional and nothing should here should be considered investment advice.