08 Apr The Most Dangerous Way To Trade
The Most Dangerous Way To Trade
Apr. 8, 2020
In fact, it’s the angriest I’ve been since 1995.
Because of an email I got last week.
The email had good intentions. I think.
It was from a very famous blogger with a very large email list who’s been a role model for thousands, maybe millions.
What made me angry?
Because he’s an apologist for the buy-and-hold-an-index-fund complex, he came out with the same old company line:
Just ride it out. The market always comes back. What doesn’t kill you makes you stronger.
The market doesn’t always come back. From 1851-1931, an index-fund investor would have made zero dollars:
Eighty years and a buy-and-hold investor would literally have nothing to show for it. How many “just ride it out” reports would have been sent in that time period?
Thanks for the “tough it out” order. Now I have no money.
Does that chart go too far back? Okay, how about we start a little analysis during the greatest bull market run in history?
Let’s say we’ve done exactly what the experts told us to do. We saved 10% of our paychecks for years and amassed $200,000 worth of savings. Lucky for us, the market always delivers 10% per year on average (MANY self-help books have quoted this 10% number) and we have $20,000 of bills each year.
The 10% the stock market always delivers will pay for all of our expenses. We’ll never have to dip into our savings nest egg. Our index fund will produce $20k and we’ll withdraw $20k. We’re set for life. That’s why we retired and/or quit our jobs.
And let’s say we started this retirement process in 2018. Sounds perfect.
With this setup, we’d be dead broke by 2030:
As it turns out, 2018 was a down year for the market. Our nest egg decreased, but we still had to withdraw the money for our expenses. Combining those two things left us with $167k.
2019 was awesome, though. The market always comes back! We’re back up to our full nest egg, even after withdrawing expenses.
And then 2020 hit. The number on the spreadsheet was the return at the time of this writing. It might be better by the end of the year. It might be a lot worse. But we’ll just say it stays right around that level of -22%.
Now we’re down to $135k.
From here, let’s assume the market does go back to its average and does this every year (it doesn’t go this smoothly, of course). And we’ll use the real-life average of 8.13% per year because that’s what the market has really averaged the past 13 years.
We should be okay, then, right? The market is producing money every year.
The real return is not what the experts told us it would be. And that slowly bleeds us dry.
Even if we don’t have another down year. Even if the market produces historically accurate returns, a $200,000 will all be gone by 2030 if we started in 2018.
Just “tough it out”?
I know it’s stupid to even consider it, but what if we used a simple trading system instead of an index fund? What if we used the Dragonfly robot during the same time period? (I currently trade this robot.)
If we used a trading system again (with the same max drawdown as the stock market), our nest egg would’ve hypothetically grown to almost $700,000.
That’s a little better than going broke. A trading system makes money while buy-and-hold loses it.
I’m not done being angry, though.
The historical evidence against buy-and-hold is actually a lot worse than this.
And we’ll discuss that in our next newsletter. Sign up for free down below.
Talk to you soon.
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It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.