The Investment Holy Grail

Hello Everyone. Following is this week's chart (Click Image To Enlarge). As you can see the green arrow still remains and has been in effect since March, 2009. This week the S&P Index closed at 1210.08, which is higher than the March month end close. While the weekly updates are important the most important analysis is done at the end of each month. This is when a determination is made as to whether the long term trend of the market is up (green arrow) or down (red arrow). As you may know the last trading day of April 30. So next Saturday's post will be the monthly update for April.












FOR YOUR EDUCATION: In the last two week's articles I made a case for the importance of consulting a reliable "timing model" to help guide you in determining as to when you should be fully invested in mutual funds and when you should have your money safely in a money market fund. This week I am going to share with you what many investment professionals know to be the "holy grail" of investing. No, it is not having a great market timing system although that is an important component. Below is a table that I put together which displays several scenarios (Click Image To Enlarge). As you can see column 1 assumes a $10,000 account for each scenario. Column 2 assumes that your account suffers losses ranging from 10% to 100%. The most important thing to focus on is column 5. This is the column which tells you how much percentage gain you must make on your account just to recover what you've lost. Take time to carefully examine this table. If you lose 10% of your account you need only earn an 11% return to get back to break even. However, if you lose 50% you must earn an incredible 100% return just to break even! It should become clear to you by now that if you just left your money in mutual funds through the entire 11/07 - 3/09 market decline your account likely suffered a loss approximating 46%. This means that just to get your account balance back to it's 11/07 levels you would have to earn close to 100%. Since March, 2009 the market has moved 52%...very impressive but you're still far short. Kinda depressing isn't it? There is a very important lesson to be learned here. Knowing when to cut your losses is THE MOST CRITICAL element to your investment success.