With the S&P 500 Index more than 35% above its recent lows, traders are happy. But celebrations ignore the fact the index is 5% lower since the start of the year.
Even after the rally, buy-and-hold (B&H) investors show a loss over the past five months. And they seem happy because the loss is less than it was a couple months ago.
If their goal is mediocre returns, B&H investors will enjoy the next 10 years. That’s because two major Wall Street firms are warning of low returns ahead.
Citi Private Bank analysts developed a model based on fundamentals.
They adjust earnings for inflation, then they average earnings over the past 10 years. With this data, they project the next 10 years.
The chart below shows the model’s track record since 1955. As you can see, the model (the light blue line) has closely matched the S&P 500 Index’s performance:
According to the model, returns will be disappointing in the next decade. B&H investing won’t work.
Fortunately, there’s a different strategy you can use to make market-beating gains.
A Recipe for Disaster for Retirees
Analysts at Bank of America found that fundamentals such as earnings don’t matter in the short run. But over 10 years, fundamentals explain about 80% of the stock market’s return.
Their conclusion is that B&H investors should expect average returns of about 6% a year over the next decade.
This news is a recipe for disaster for investors hoping to retire one day.
An average gain of 6% a year turns $10,000 into less than $18,000 after 10 years. Given current interest rates, that would generate only about $45 a month in income.
That’s less than many investors need to retire. That’s also below the market’s historical average returns.
The bottom line is B&H worked well for most of the past 40 years, but preparing for the future might require different strategies.
There’s a Smarter Way to Invest
Short-term trading is appealing in this environment.
Since the beginning of the year, the S&P 500 Index has moved up or down by at least 5% on 19 different occasions. These small moves lasted as little as one day and as long as seven weeks.
Many 5% moves offered opportunities to profit. Catching just one-fifth of each move would allow traders to book profits of almost 20%.
This year has been unusually volatile. In 2019, volatility was unusually low. There were just seven moves of at least 5%.
The average minitrend lasts seven weeks. Most years, there are at least a dozen 5% moves in the S&P 500 Index.
Each small move is a profit opportunity. These small gains can generate market-beating profits.
Trading small moves can also reduce risk. Rather than holding through a 30% decline, short-term traders take small losses and look for the new trend.
I’m Lifting the Curtain on My Secret New Strategy
This isn’t just a theory. Next week, I’ll share details on a strategy I’ve been using to raise money for a local animal rescue.
I started with $10,000 and, so far, I’ve donated more than $5,000 to charity.
This account shows a gain of more than 76% from January 1 to May 31.
To learn more, click here.
Michael Carr, CMT, CFTe
Editor, Peak Velocity Trader