Seeking Alpha
Long only, portfolio strategy, dividend investing, ETF investing
Profile| Send Message|
( followers)

In this article, I will be detailing a simple buy and hold strategy for the 21st century investor. I will be comparing my strategy to the strategy of buy & hold using dollar cost averaging. The strategy I will show is a buy and hold strategy, but my strategy uses investor fear for entry points rather than a certain date or time period. Many investors will invest new money every month or once a year at the beginning or end of the year.

Starting Time: For my example I will start in 1994, which is as far back as there is a full year of data for the SPDR S&P 500 ETF (NYSEARCA:SPY), and the Volatility Index [VIX] (NYSEARCA:VXX).

Buy & Hold Strategy

For the basic buy & hold strategy, I will be using the simple strategy of buying 100 shares of the SPY each year on the last trading day of the year. This is a straightforward strategy where an investor can dollar-cost average their position without having to try to figure out when to buy. In the table below is the data for someone who would have bought 100 shares of the SPY at the end of the year, along with the current cost basis for the portfolio as well as the price return.

Date

Price

Shares

Value

SPY

12/30/1994

45.56

100

$4,556

SPY

12/29/1995

61.48

100

$6,148

SPY

12/31/1996

73.84

100

$7,384

SPY

12/31/1997

97.06

100

$9,706

SPY

12/31/1998

123.31

100

$12,331

SPY

12/31/1999

146.88

100

$14,688

SPY

12/29/2000

131.19

100

$13,119

SPY

12/31/2001

114.3

100

$11,430

SPY

12/31/2002

88.23

100

$8,823

SPY

12/31/2003

111.28

100

$11,128

SPY

12/31/2004

120.87

100

$12,087

SPY

12/30/2005

124.51

100

$12,451

SPY

12/29/2006

141.62

100

$14,162

SPY

12/31/2007

146.21

100

$14,621

SPY

12/31/2008

90.24

100

$9,024

SPY

12/31/2009

111.44

100

$11,144

SPY

12/31/2010

125.75

100

$12,575

SPY

12/30/2011

125.5

100

$12,550

SPY

12/31/2012

142.41

100

$14,241

Total Shares

1900

Total Value

$212,168

Cost Basis

$111.67

Current Price

$165.93

Price Return

48.59%

My Strategy

My strategy is simple: use a similar buy & hold technique as the traditional strategy but instead using the VIX for entry points. To determine when a good entry point is I will use a 30 period simple moving average of the VIX, and when that moving average crosses below the 30 level, that is an entry point. For some periods, the VIX never gets above 30, therefore in those years you do not purchase any shares of SPY. Instead, the next time the VIX 30 period moving average crosses below 30, you purchase 100 shares for that current year, along with the number of shares for each of the years the VIX moving average did not go above 30.

Why choose the 30 level? & Why choose a declining VIX moving average?

The first question someone would have with this strategy is why the 30 level on the VIX, and why when the moving average is moving down below 30?

The reason I chose the 30 level is that 30 has been a historically important level on the VIX, which has occurred during times of investor fear.

The reason I chose the moving average decreasing below the 30 level, is because for someone that employs a buy & hold strategy, they tend to be more conservative investors, so choosing a period of still relatively high fear to capitalize on that fact, but with the trend going towards less fear.

Data

The first time the VIX moving average fell below 30 was in 1997, so because there was no entry point for the three years prior you would buy 100 shares for each of those three years along with the current year, for a total of 400 shares. This is repeated again in 2001 and 2009 where in years prior the VIX average was not above 30.

Date

Price

Shares

Value

SPY

12/15/1997

96.72

400

$38,688

SPY

11/23/1998

119.38

100

$11,938

SPY

11/23/2001

115.68

300

$34,704

SPY

11/27/2002

94.28

100

$9,428

SPY

4/10/2003

87.51

100

$8,751

SPY

6/26/2009

92.7

600

$55,620

SPY

7/9/2010

107.96

100

$10,796

SPY

12/16/2011

121.59

100

$12,159

Total Shares

1800

Total Value

$182,084

Cost Basis

$101.16

Current Price

$165.93

Price Return

64.03%

Closing Thoughts

Based on the results from my example, using my strategy provides superior price returns, because of the lower cost basis. Since 1994, my strategy outperformed the traditional buy and hold strategy by 15.44%. The reason my strategy has a lower cost basis is because the entry points are during times of fear, and you buy more shares than normal at those prices because of the VIX average not being above 30 in previous years.

As my strategy shows it is simple, with modern charting software available to anyone, to plot a 30 period moving average for the VIX, and when the average decreases below 30, that is a buy point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Buy And Hold For The 21st Century Using The VIX As Your Guide