SCOTT WELSH BIG POINTS BLOG

Can Buy-And-Hold Do This?

Can Buy-And-Hold Do This?

May 29, 2020

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Here’s the short answer.

Almost any fundamentally-sound trading system is better than buying-and-holding the market.

But if you’re looking to invest, the experts are all in agreement:

Just buy-and-hold and index fund forever.

Even though the data says that’s really bad advice.

If it’s bad advice, why do the experts tell us to buy index funds?

It’s either ignorance or apathy.

To which the experts reply:

“I don’t know and I don’t care.”

To make my case, I’ll simply use one trend following robot. Not a diversified portfolio. Just one robot.

[A robot is software with rules for taking trades.]

It will be one chart versus a trillion dollar industry.

In one corner, we have the old guard. The smart money. They are convinced by dusty academic papers and word-of-mouth regurgitations.

Here are the facts.

From 2007-2020, buying-and-holding the SPY (the S&P 500 ETF that anyone can buy) would have turned $10,000 into $21,458 with a 57% max drawdown.

[Max drawdown means the biggest drop in the account during the time period. For example, in 2008, a trader would have seen her account drop 57% in value during the worst stretch.]

The VFINX, the Vanguard Index Fund that comes highly recommended and anyone can buy, would have produced almost identical numbers.

That’s how the smart money does it. Buy the SPY, buy the VFINX, and just watch the money roll in over time.

In the other corner, we have a basic automated system based on hundreds of years of research. It’s only used on the GBPJPY currency pair and trades 0.5 lots to start.

[A typical trade size for currency trading is 1 lot. We’ll do half that.]

At the end of each year, the trade size is adjusted up or down depending on how much profit is produced or how much it lost. That is a one-time-per-year calculation that takes 34 seconds of work.

[I can explain that another time. It’s easy.]

This system trades 50-day breakouts on a Daily chart and has basic settings loaded into the software. All of those settings are provided for a new investor. It would take no personal analysis to hold an index fund or trade with a robot. You get started once and let it ride.

By using this one robot from 2007-2020 and doing one adjustment each year, $10,000 would have turned into $117,000 with a max drawdown of 49%. See the yearly calculations here:

A simple system has less drawdown and produces 5x more profit. A lot more money for less risk.

The crusty academic papers never talk about that.

So, how should I invest my hard-earned money?

The short answer is: use a trading system.

 

My book is called The Inevitability of Becoming Rich, and you can find that here.