Here’s the very first thing any newer investor should not just know, but truly understand, consider, and personalize, if they want to be successful.
Markets are cyclical. More than anything else.
How cyclical? When I was first learning about markets, circa 1980 something, they taught us that major stock market cycles (bull and bear) tend to last about 16 years each.
Here is a chart of the S&P 500 Index ($SPX) starting Jan. 1, 2000. I could have started at the March peak that year, but I wanted to keep the dates clean. The chart goes through Jan. 1, 2013. So 13 years. How much did the S&P 500 average per year? During that time? About ZERO PERCENT.
More importantly, look at the path it took, starting at a time that reminds me of this very era, the dot-com bubble. How much of that 13-year period was the S&P 500 making “new highs” versus that peak in 2000? Virtually none of it. That’s what a tech bubble, financial crisis, and recovery over 13 years will do… and it’s terrible.
Because it is not just “I started with $100 and 13 years later it is still $100.” It is the impact of inflation, and the tremendous lost opportunity. There’s more to investing than buy-and-hold stock and equity ETF strategies.
If you only remember three things about stock market investing, let it be these: Cyclical, Cyclical, Cyclical! That’s why I’ve been a technician for 40+ years. I think it is where the markets tell their story. Not only over short time frames, but over very long ones too.
Now, let’s check out the Invesco QQQ Trust (QQQ). After all, the S&P 500 is the “diversified index,” right? Well, not like it used to be. It is crowded into a relatively small number of stocks, with about 25 of them determining what index-tracking ETFs do. The other 475 companies don’t matter much to the full index.
Why is that a problem? It isn’t, until the tide turns. If and when it does… it’s a big problem. The consequence is losing a decade or two (such as between 1929-1954).
Here’s QQQ. With all those next-gen growth stocks and world-changers.
So, did QQQ make up for the lost time that investors had with SPY and similar ETFs? No. It added time to the misery! 16 years of nothing. Except in this case, the decline was more than 80%, and it was faster. Then, once it bottomed in March 2003 (I remember it well!), it continued to be somewhat of a “bottom feeder.” That’s what I call it when an ETF like QQQ goes from over $100 a share to under $20, then rises to $40 but then declines toward the previous lows again. Look at early 2012 in that chart above. QQQ reached $50. Up from $20 at the low, great! But still half its value from back when times were happy for stock investors.
What’s a better way?
Let’s define “better.” Since we do not know the future, and we need to decide now where to invest, and the strategy and process we’ll use to get what we want out of our saved assets, what defines “winning” is important for every investor to decide instead of simply “hoping for the best” at a time of extreme market conditions.
My personal recommendation stems from my own success using the simplest ETF portfolio I’ve ever built.
I’m on record as saying that a portfolio containing only the SPDR S&P 500 ETF Trust (SPY) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) can potentially solve that core investment allocation challenge for at least 80% of investors.
The key is that in addition to the two ETFs, you need a plan to allocate among them. Not one or the other, though there will be times when one is so attractive, you might not want much of the other. And while my method is simply to take the weekly ROAR Score of SPY, allocate that percentage of the portfolio to it, and invest the rest in BIL, that’s only one way to play this.
You could maintain a static allocation to the pair, and revisit it once a month. Or once a quarter, or once a year. Or when the market moves a lot, up or down. Or, you can swing trade between the two.
My point is that the concept of diversifying between stocks and cash is not new. But with the markets so highly correlated now, it makes sense to start super simple. As we know, you can make it as funky and exotic as you wish, once you move up the learning curve a bit.
That chart above really speaks to me, and hopefully to you too. It shows that simple 2-ETF, SPY-BIL allocation, addressed once a week by seeing my ROAR Score (free to track 24/7 at my site, see footnotes below), and determining if the allocation to SPY is still in line with what that automated chart reader (that’s what ROAR is) says at that point in time.
We track the performance from the start of the “modern era” of investing (2020), and while it won’t compete with a 100% SPY allocation (pink line), it actually moved in lock step with the Invesco S&P 500 Equal Weight ETF (RSP) That’s the same S&P 500, but with the stocks equally weighted instead of by company size.
That speaks volumes to me as a tenured investor. Because if you check out the data above the chart, you see that the simple 2-ETF SPY-BIL portfolio earned 8.5% annualized over that time, but at no point lost more than 13% of its peak value. It kept me in the game, financially and emotionally. What was RSP’s maximum decline: nearly 40%! Similar return with one-third the risk. That’s taking market cycles seriously. Not to time the market, but to survive the down cycles with a lot more capital than your friends and neighbors.
Up cycles are great. But you can’t forget to plan for what happens when things go down.
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob’s written research, check out ETFYourself.com.
