December 2nd, 2008

20% Average Annual Return? "Fogettabout it"!

There’s not more to add to what has already been said by many others:

  • 25% decline over 12 trading days followed by
  • 18% gain over 5 trading days (largest in over 70 years)
  • 8.93% decline in single day; largest decline for first day of the month since 1930

Remember when commentators would get on the air and proclaim that “next years the market will be up (down) 15%” and we’d all think to ourselves “market going up (down) that much would be nice”. I remember when the Tech Bubble was beginning to burst that talking heads were saying that investors should forget the 15-20% average annual returns they’d come to expect in the stock market.

“Fogettabout it”! We can do that overnight, in a couple of days at most. I don’t know what I’d do if I were fully invested (as I was at the end of last December) and saw my portfolio fluctuating that much. Fortunately (actually, I attribute it to some great analysis, foresight and discipline), I’m still about 90% cash so I can sleep at night. Here’s the current picture:

When and how is this all going to end? That’s what readers want to know and keep asking. My October 30 post was entitled “Extrapolating to the “All-Clear“. On that day, the S&P 500 closed at 954.09, or 16.9% above today’s close. At the time, it could reasonably be projected that the all-clear might come around New Years if the market averaged increases anything over .05%/day or 10%/month.

Due to the fact that another month has passed and today’s dramatic 9% decline has increased the gap that needs to be bridged, the new extrapolations are:

The earliest “all-clear” is pushed back to around the beginning of February is the market can squeeze out an average monthly increase over 10%. At an average daily increase of 0.25%, or average of 10%/month then the “all-clear” won’t take place until late in March.

All these extrapolations are predicated on the assumption that the market can get its act together and not decline significantly further and can start moving up on a fairly consistent basis. Until it does, purchase of the average stock will continue to be risky and subject to a high probability of further loss (at the least, little prospect of capital appreciation).

I’ve laid out several strategies that can be explored while we wait this out.

  • There was “The Parking Lots Called SHY, TLT, IEF and AGG” of November 17. Boy, I wished I’d taken my own advice on that one.
  • Then there was the series begun on November 15, entitled “Those Perpetual, In-the-Money Call Options
  • Finally, there was the “Early Stage Momentum Stocks” series begun on October 17, or the stocks that formed “Golden Crosses”. The model portfolio on the right is based on less than 20 I considered the best. While showing a loss, the portfolio has performed 6.4% better than the S&P 500 over the same 6 week period.
  • There’s always trying to catch the wave using Proshares UltraShort and UltraLong ETFs.

More on stock selection strategies during this transition period to follow. In the meanwhile, don’t lose your cool. Better times will come … hopefully by next summer.

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