Over the last few months, numerous readers stated concerns as to the usefulness of a "Buy & Hold" approach to investing. This concern comes from the experience of the last ten years where we experienced two significant bear markets. I too have been thinking about this issue and one response is to come up with the ITA Risk Reduction model for portfolio management.
What options are open to investors who wish to minimize losses? Below are a few I've used over the years, but not always with stellar success.
1. Develop a timing model that moves dollars out of the market and into cash. Using the 195-Day or 200-Day EMA is such an approach.
2. Reduce portfolio volatility by introducing some sort of hedge. Buying and selling an ultra-short ETF such as SDS is one such option. Knowing when to put on and when to take off the hedge is extremely difficult
3. Due to difficulties implicit in numbers 1 and 2 above, most investors will reduce portfolio volatility by holding low volatile investments in the portfolio. Bonds and treasury ETFs are examples of lower volatile investing vehicles. Readers who follow the various QPP analysis on this blog know that bonds reduce portfolio volatility. This does not imply that bonds never lose money. We learned that lesson in 2008..
Any timing model needs to be right twice for every market cycle. That is one reason market timing has such a bad name. It requires discipline, patience, and perhaps a bit of luck.
Here at ITA Wealth Management, I am going to test option #1, and from time to time #2. Option #3 is almost always part of every portfilio, particularly for investors in or nearing retirement.