More Buy-And-Hold Myths Debunked
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  1. Another Flawed Buy-And-Hold Theory
  2. A More Realistic Analysis
  3. Putting The NAAIM Study In Perspective
  4. The Elusive Bear Bottom
  5. The Recovery Fallacy


For years, I have written about the frequent misleading arguments put forth to keep investors in buy-and-hold investments. I am pleased to say that such articles, such as my recent March 3 E-Letter highlighting a misleading Investors' Business Daily article, have been well received by readers and the feedback has been very positive.

The information I have provided over the years allows you to ask critical questions when confronted with these one-sided arguments. In fact, I have even heard from brokers and other financial professionals who now "see the light" in regard to actively managed programs and want to know how to access actively managed strategies for their clients.

Unfortunately, this has not slowed the flood of misinformation being distributed by the usual suspects in an effort to support buy-and-hold investment strategies. It seems that the more I write about skewed articles, studies, etc., the more examples I see of them being generated by Wall Street and the brokerage community to sway unsuspecting investors.

I recently received an e-mail from a major mutual fund family promoting the buy-and-hold concept. While I am not at all surprised that a mutual fund company would be trying to keep investors in their funds, I was disappointed to see that the argument used was a very old, and thoroughly discredited line of reasoning known as "don't miss the best days in the market."

I'm not going to disclose the company that published the e-mail I received, but it really doesn't matter. You can look in the archives of virtually any major brokerage firm or mutual fund family and likely see similar titles. As I pointed out in the March 3 E-letter, it's in their best interests for you to stay invested, even though doing so may not be in your best interest. Thus, you need to look out for your own best interest when you deal with them.

In this week's E-Letter, I'm going to (again!) debunk the flawed argument of missing just the best days in the market. After that, I'm going to take on those who are calling an end to the bear market. Since the new lows in early March, the stock market has rallied. Naturally, Wall Street's cheerleaders are saying that we've hit the bottom and are now on our way back up out of the hole we've dug. Perhaps we have, but they've been wrong before – lots of times – as I will point out.

After that, I'll debunk yet another Wall Street myth that is based on accurate historical data, but is really just another misleading way to convince investors to stay in the market at all times. In the end, I hope that you will feel empowered to resist and even counter the seemingly endless sales pitches, media interviews, articles and other sources of misinformation that seek to hang on to the buy-and-hold message despite the clear evidence that such programs simply don't always work.

If you've read this far, then read what follows very carefully. Traditional investment providers and mutual fund families are making my long-held case against buy-and-hold in spades, even though they don't know it!

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.


Another Flawed Buy-And-Hold Theory

As I have frequently mentioned in recent E-Letters, Wall Street's media and advertising machines are still trying to defend buy-and-hold and disprove the value of active management. I noted back in January that I had received an e-mail from a prominent mutual fund company that continues to perpetuate one of the worst examples of Wall Street's misguided conventional wisdom. Not only was the material significantly dated, but it also presents a buy-and-hold argument that I have thoroughly discredited a number of times.

The story goes like this: Historically, much of the stock market's upward moves are concentrated in a relatively small number of market days (which is true). Thus, they allege, if following a market timing strategy takes you out of the market on those days, then your returns will suffer dramatically. Therefore, they maintain that it is important that you stay in the market at all times so that you will not miss these good days.

The e-mail I received had an attached file that presented their bogus argument in full color. Pulling S&P 500 Index performance information (including dividends) from 1988 through 2007, the illustration showed that the S&P 500 Index had an annualized return of 11.82%. However, if you missed just the 10 best days of performance over that 20-year span, your return would drop to 9.20%, a reduction of over 22%.

Missing more of the best days means even lower returns. For example, if you missed the 40 best days in the market over that 20 year period, your annualized return would fall to only 3.77%, a reduction of over 68%. Thus, Wall Street's conventional wisdom reasons if you want to maximize your returns, you must stay in the market so that you don't miss the good days.

While the numbers quoted in the sales piece are accurate, this analysis is obviously skewed to fit the viewpoint of the buy-and-hold crowd, but they hope you won't notice. For example, the first major flaw is the time period covered. This e-mail hit my mailbox in early December of 2008, long after some of the worst stock market losses in history. Yet, the best-days analysis only goes through the end of 2007, just a little over two months after the market had hit new highs.

Being in the financial services business, I can understand having to use information that is provided as of a certain cut-off date, since the number crunching required to produce the piece is considerable. However, to send a marketing piece with information as of 12/31/07 when the market has subsequently melted down is, in my opinion, misleading to the extreme.

The National Association of Active Investment Managers (NAAIM), of which my firm is a member, is a trade association of money managers specializing in active management strategies, including market timing. Each year, NAAIM publishes its own study in regard to missing the best days in the market. However, NAAIM's version provides a much more balanced analysis, as I will discuss in more detail below.

Since the e-mail I received was so dated, I used NAAIM's study to get a better idea of the updated numbers. It is important to note that NAAIM's study measured performance over a longer time period – from January 1984 through December 2008 – and excluded S&P 500 Index dividends. However, the basic outcome is the same.

NAAIM's analysis found that a constant investment in the S&P 500 Index (excluding dividends) would have resulted in an annualized return of 7.06%, evidence of the effects of the 2008 market meltdown. However, if you missed just the 10 best days in the market over this period of time, your annualized return would drop to only 4.10%. This is a decrease of 42% – even worse than the analysis for the time period ending in 2007. As you increase the number of days missed, the differential becomes greater, to the point that if you missed the 40 best days in the market, your annualized return would actually be negative.

On its face, you might think NAAIM's study actually supports the buy-and-hold position, but you have to first consider another major weakness of the buy-and-hold argument. The next and most obvious flaw to an informed reader is that the analysis assumes that an active manager would be OUT of the market on all of the best days, but IN the market on all of the worst days. Unfortunately, many investors buy this argument hook-line-and-sinker without thinking to ask the question, "What happens if you miss the bad days in the market?"

This is a very critical point, so let's bring it out into the light!

Using numbers from the same NAAIM analysis discussed above, let's reverse the assumptions and see what happens. Instead of missing the good days in the market, let's say that a market timing Advisor allows you to miss only the worst days in the market. Over the 1984 through 2008 time period, NAAIM's analysis shows that if you missed just the 10 worst days in the market, your annualized return would have been 11.23% vs. the 7.06% Index return.

That's a 59% better return! Compared to the 42% reduction in return we get when missing the 10 best days, we find that missing the bad days in the market is actually more significant than missing the good days in regard to the effect on returns. Now that's impressive! I'll bet your buy-and-hold broker never told you that. As you increase the number of worst days missed, the numbers get even better, resulting in a return of 17.59% if you missed the worst 40 days in the market over this 25-year period of time.

Of course, this analysis is as flawed as the first one, since it assumes that the Advisor is smart enough to be out of the market on all the worst days, but in the market on all of the best days. We, at least, are willing to point out the fallacies in both arguments.

A More Realistic Analysis

Since both sets of performance numbers discussed above are skewed to fit one approach or the other, neither is useful to the knowledgeable investor. However, NAAIM's study also covers what would happen if an Advisor missed BOTH the best and worst days in the market over the 25-year period. The results are pretty amazing.

If you missed the 10 best and 10 worst days in the market, the resulting return would have been 8.15%, as compared to the 7.06% S&P 500 Index return.

As the number of best and worst days missed is increased, the percentage return stays essentially the same. For example, if the best and worst 40 days are all missed, the annualized return would have been 8.82%, still almost 2% better than the S&P 500 Index return over the same time period. The table below shows the effect of missing various combinations of best and worst days in the market over that 25-year period. Compare these numbers to the S&P 500 Index annualized return of 7.06% over the same period of time:

If you missed just the best:

Your return fell to:

10 days


20 days


30 days


40 days


If you missed just the worst:

Your return rose to:

10 days


20 days


30 days


40 days


If you missed best and worst:

Your return was:

10 days


20 days


30 days


40 days


(Source: NAAIM, Inc., based on an analysis performed by Hepburn Capital Management, LLC, 805 Whipple St., Suite D, Prescott, AZ 86301. This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)

Thus, while the average annual return percentages showed the results of the recent bear market, the basic result stayed the same: missing bad days in the market can more than compensate for missing out on the good days. Even when the general direction of the market was downward, missing out on the worst declines still proved effective in enhancing performance.

Putting The NAAIM Study In Perspective

While it may be the goal of every active money manager to be in the market only on the good days and out of the market on all of the bad days, we all know that such a perfect system doesn't exist. Over the course of writing this E-Letter through the years, I have discussed that the ultimate goal of market timing, in my opinion, is not necessarily beating the market, but to attempt to control the downside risk of being in the market.

I base my opinion upon studies such as those done by the Dalbar organization that demonstrate the negative effect of emotional trading upon investors' long-term returns. We all know how it is when we lose money on an investment. Should we stay the course, bail out and go to cash, or move to something that seems to be performing better?

The above analysis by the NAAIM organization shows the value of being out of the market on the worst days, even if you miss some or all of the best days. That's because the worst days are often far worse (in terms of percentage loss) than the best days are good.

For my company, the practical application of this information is to seek out professional active money managers who are able to miss more bad days than good days and thus provide added value over and above the management fees they charge. Quite frankly, even most professional active managers can't accomplish this, but there are some who have done so and it's our job to find the ones who can.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.


The Elusive Bear Bottom

As I noted in last week's E-Letter, it is interesting to me just how giddy Wall Street and the financial media have become at the prospect of a renewed bull market with the nice rally we've seen over the last week or so. While we are nowhere near out of the woods yet, in my opinion, you wouldn't know that from listening to the talking heads on the financial shows.

As you might imagine, those who promote buy-and-hold investment strategies are also experiencing a brief reprieve from the steady drop in their products and portfolios. With a string of market gains at least partially fueled by the Fed's announcement that it will be buying about a trillion dollars worth of debt, happy days are indeed here again. Or so it would seem.

I found myself wondering just how many analysts, journalists, talking heads, etc. have predicted an end to the current bear market over the past year or so, only to be treated to additional losses.

The steady stream of bottom calls reminds me of an old auto repair commercial. It told the story of an unfortunate driver who had to take his car back many times to get a simple repair done. The first time, the mechanic declared that the car was "better than new." The next time, he said it was "much better than new." After a third shot at the same repair, the mechanic declared it to be "much, much better than new." I think you can get the picture.

The same kind of situation seems to be going on in the stock market. Every time the stock market hits new lows, we hear that it is a much, much stronger bottom than before, and should mark the point at which stocks will now begin to rise again. Of course, it seems that, just like the driver in the ad, we are eventually met with disappointment (not to mention additional losses) as the market sets yet another new low.

To illustrate how a market bottom is much, much harder to call than you might think, I have listed below predictions by major analysts and commentators calling a market bottom. For reference, the most recent dip in the S&P 500 Index took it down to 676 on March 9th and the Dow Jones Industrial Average (Dow) hit 6547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

  • In January of 2008, well-known perma-bull Abby Joseph Cohen predicts that the Dow will reverse its recent downturn and be at 14,750 by the end of the year. At this point, the Dow was not yet in an "official" bear market, and Ms. Cohen evidently thought it wouldn't get there. The Dow started 2008 at 13,265, so Ms. Cohen's prediction was for a gain of over 11%.

  • On March 17, 2008, the demise of investment banking and brokerage giant, Bear Stearns, led some analysts to declare a "Bear Stearns Bottom." CNBC market maven Jim Cramer declared that the bear market had been tamed, and one-third of the respondents to a CNBC poll declared that they thought the worst was behind us. The Dow was then at 11,972.

  • On July 31, 2008, Jim Cramer, undaunted by his previous erroneous call, announced that the Dow's July 15, 2008 low of 10,962 would be the bottom of the bear market. His reason, among others, was that negativity was so high that he thought the market had reached "capitulation." As Cramer put it, "Bye, bye bear market."

  • On October 9, 2008, professional stock trader Tony Oz declared that the market was near a significant bottom. The title of his article was "If We Aren't Near A Bottom, Find A Cave & Buy Guns." The Dow closed at 8579 on October 9th.

  • On November 20, 2008, the Dow posted a new low of 7552, which prompted some analysts to again declare that the bear market was dead. This call became even louder as the low continued to hold on into 2009. However, the Dow eventually broke through the 7552 low on February 27, 2009.

  • Finally, many investors thought that the New Year (accompanied by a new presidential administration) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8776, yet it continued to fall even further until hitting 6547 on March 9th, its lowest level yet during the current bear market.

And these are just a few of the many incorrect market calls that some refer to as "false bottoms." If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottom. Unfortunately, many people follow the sage advice of these individuals, resulting in significant losses in their buy-and-hold investment strategies.

Just think, anyone who thought Abby Joseph Cohen was right in early 2008 witnessed a further drop of 6718 points in the Dow from the first of January 2008 when the Dow was at 13,265 through the market's most recent bottom of 6547 on March 9, 2009. That's a percentage drop of over 50%. Unfortunately, many buy-and-hold investors also saw their own investments fall by that much or more during this period of time.

The Recovery Fallacy

The importance of the above market bottom discussion becomes apparent when you consider another bogus argument often used by the buy-and-hold crowd to sell the supposed superiority of that strategy. Specifically, proponents of buy-and-hold strategies claim that one reason that you should not try to "time the market" and move your assets to cash occasionally is that you'll miss out on the early phase of the new bull market.

They then provide statistical analyses to show that most gains are concentrated in the early phase of a bull market, so if you are on the sidelines, it is highly unlikely that you will get back in the market in time to capture any of these gains. Their solution? Stay invested at all times and you'll be sure to be in the market when it eventually turns around.

It might surprise you that I agree with the statistical analyses used in this argument. After all, historical market action is what it is, so the pace of historical gains following the end of bear markets is a matter of fact. Of course, bear market rallies (aka: sucker rallies) also often shoot up quickly, only to return to lower levels later on. However, let's assume that it is correct to assume that much of the rebound in stock prices is concentrated in the early part of a new bull market.

The problem is that this argument is valid only if you are contemplating cashing out when the bear market is at or near its actual bottom. And as we have discussed in this article, it's not always easy (read: impossible) to tell exactly when or where the bottom will occur. Even so, if you get out of the market at the very bottom, then it is very likely that you'd miss out on a significant part of any subsequent market rally.

However, buy-and-hold supporters never discuss how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out. Take the above situation where the Dow fell an additional 6718 points after Ms. Cohen made her incorrect call for a market rebound in 2008. This drop represents a 50.6% reduction in the value of the Index, and many unfortunate investors took that same downward ride.

Thus, the fallacy of this buy-and-hold fairy tale is that they don't tell you how much additional loss you may have to incur before the real market bottom and a new bull market begins. And then, there's the matter of the "mathematics of recovering losses." As I have noted in past E-Letters, a loss of 20% requires a 25% return just to get back to break-even. A 50% loss requires a 100% return and so on. Read on and you'll find out how important this is to your investment well-being.

So, how much would investors have "suffered" had they gone to cash just when Ms. Cohen said that it was safe to be in the market? Let's say that an investor moved to cash despite Ms. Cohen's advice in January of 2008. The buy-and-hold crowd would say that he was unwise, since his cash position would likely miss out on the gains concentrated in the early part of the next bull market. Oh really?

Using the Dow as a proxy for an investment portfolio, our sample investor who moved to cash in January 2008 missed out on a further 50.6% drop in value. That doesn't sound unwise to me! Plus, the mathematics of losses of 50+% dictate that a buy-and-hold investor would need a gain of over 102% just to get back to the position he was in by going to cash in January of 2008.

In other words, this investor could stand to miss out on the first 102% of a new bull market's gains before he would be worse off financially than had he not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager (no guarantees, of course).

Just for fun, I thought I'd compare where the market indexes were on the dates of the incorrect market bottom calls listed above, and see how much more the market dropped after that using the March 9, 2009 low of 6547. Then, I calculated the amount of return necessary to get back to that point. The result will be an analysis of just how much return you could have missed out on in the early stages of a market rally and still not been harmed.


Dow Position

Additional Loss to March '09 Low

Gain Required to Break Even

January 1, 2008


6718 (50.6%)


March 17, 2008


5425 (45.3%)


July 15, 2008


4415 (40.3%)


October 9, 2008


2032 (23.7%)


November 20, 2008


1005 (13.3%)


January 1, 2009


2229 (25.4%)


The most obvious lesson learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the buy-and-hold crowd says. As the above table represents, the potential to lose more money before an actual market bottom occurs very effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. While it's true that investors who went to cash on any of the above dates may also miss out on future gains, the figures show that they can well afford to miss out on at least part of the rebound.

The next, and most important, lesson is that using a professional active manager may actually improve your chances to maximize gains in a renewed bull market. The goal of active management is not just getting out of the market at the right time, but also knowing when to get back in. While no active management strategy is perfect, the goal is to move out of the market as it goes down, and then get back in during the early stages of a new bull market. If successful, the end result would be better portfolio performance than if you had stayed in buy-and-hold investments. Of course, no one can guarantee that this goal will always be met.

A recent publication by Fidelity Investments notes that the stock market has typically bottomed out approximately half-way through a recession. Since the stock market tends to anticipate economic recovery, it usually starts rising before the recession is over. According to Fidelity, over the course of the past 14 recessions, the median return between the stock market's lowest point and the end of recessions has been 25.2%, which supports the claim that gains are concentrated during the early months of a new bull market.

Of course, Fidelity concludes that this level of return during the early part of a renewed bull market should convince you to stay invested no matter what. However, considering that only one of the entries in the above table requires a return of less than 25% to break even, I think the Fidelity study shows that it may be worth the risk to jump out of the market from time to time, even if you miss the first "false bottom."

The result is clear – going to cash during a bear market is probably going to be more harmful to your broker or mutual fund company than it might be to your portfolio.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.



The question now becomes whether the March 9th low was "THE" bottom, or just one of a series of recurring lows that may or may not mark the end of the bear market. I wish I knew the answer, but I'm one of the rare breed of analysts who will admit that I don't have a clue as to when the bear market may end. As this is written, the market is rising based on the hope that Treasury Secretary Geithner's recent disclosures will bring an end to the credit crunch. Maybe the buyers are right, but then again, maybe they're wrong.

As far as advice, if you are in a buy-and-hold portfolio and have been riding the market down since October of 2007, you might want to see if this rally has legs before jumping out of the market. While I still believe that active management is the way to go, I also don't see any reason to bail out during an upswing, even if it may be short-lived. However, I'd be ready to move to cash at the first signs of weakness.

On the other hand, if you have been on the sidelines in cash for a while and are wondering whether now is a good time to get back into the market, I recommend that you give our actively managed strategies a look before deciding what to do. All of our money managers use time-tested strategies to let them know when to get back into the market, and when to stay out. And some even have trading models that can even make money in down markets.

Whether we have or haven't hit the market bottom, I'm glad that I have most of my money being invested by professional active money managers. As a result, I don't worry about how my portfolio is positioned in the current economic and market environment. If you would like to learn more about these strategies, feel free to give one of our Investment Consultants a call at 800-348-3601, send us an e-mail at [email protected], or visit our website at

Finally, I hope that you are enjoying these E-Letters in which I debunk some of the skewed and misleading studies produced by Wall Street firms to convince you to buy investments and hold them indefinitely. While some of the reasoning employed in these articles and marketing pieces are laughable, the losses incurred by investors swayed by these faulty arguments are not.

Hopefully, you have already taken my advice over the years as to the perils of buy-and-hold investing, and you have not incurred all of the historic losses over the past year or so. In any event, you may have friends or relatives who might benefit from this information. Therefore, feel free to forward this E-Letter to anyone you feel may benefit. It might open their eyes to some of the misleading arguments used to promote buy-and-hold strategies.

Hoping we can help you in these tough times,

Gary D. Halbert


The Deception Used by Fund Managers to Keep You Fully Invested in Their Funds

The Toxic Assets We Elected (excellent read)

Don't Forget About Inflation


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 03-24-2009 3:39 PM by Gary D. Halbert
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