As an investor who's really gained and really suffered with investing over the last 20 years, especially over the last 2 years, it became apparent to me that there must be a better way. There is. I assembled a slew of statistics, narrowed them down to 4 and found a model that is very accurate at indicating when to make portfolio changes. This model has signalled every recession and every bull run since 1970. It does not call market tops or bottoms - it does provide an exit point near tops and an entry point near bottoms. It beats out the buy and hold stategy significantly.
For example, a $10,000 investment beginning Feb 1971 (earliest data I have for the Nasdaq) would have returned (including a 20% capital gains tax) through August 2001 month end vs buy and hold:
DJIA = $167,414 vs $103,220
S&P500 = $180,366 vs $107,166
Nasdaq = $536,621 vs $168,156
Importantly, an exit point was called before the 73/74, 80, 82 and 90/91 recessions and at the end of March 1987 and Feb 2000. More importantly, you would have been in the market for the major bull runs in the 80's and 90's.
Another important point is that it did not call an exit point in late summer, early fall 1998 - my model continued to signal a good market - as such, that would have been an excellent time to add to positions.
When I speak of exits I don't mean to get out of the market entirely, although you can do that and you will still beat the buy and hold strategy. What you really need to do to significantly beat the market is to stay fully invested but rotate into defensive positions at the exit points. It is this rotation that makes the difference.
For your entry positions, you can pick individual stocks (much riskier) or index stocks. I have chosen index stocks for my model because they're easier to track, appeal to most investors and most importantly, they work. As such, if you are an aggressive investor, chose the Nasdaq (QQQ). If you are a conservative investor, chose the DJIA (DIA). If you are undecided, chose the S&P 500 (SPY). For your Defensive position, I have chosen the Drug stock sector represented by the PPH. I have attached a portfolio of the index tracking stocks you can invest in. It is important to note that these index stocks have not been around since 1971. As such, I have used the averages themselves for the model through the OUT signal in Feb 2000 and the index stocks since then.
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