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Buy and hold investing is a popular strategy, and the thinking is straightforward: in the long run, the market will offer returns, in spite of short-term volatility. In theory, this is a sensible idea. Unfortunately, this approach does not work in today’s market.

Why not? Of course, the market is down for this month. But that’s not the reason this is not a buy and hold environment. It’s not just about the recent correction, or the end of a market rally. The current trend fits into a much bigger picture… and it’s a picture of a long-term bear market.

Secular markets are long-term trends, typically lasting about 18 years. Secular bull markets generally see stocks return at least 20% for the duration, while secular bear markets see stocks decline at least 20%. And these secular trends are interspersed with shorter, cyclical bull and bear markets.

From 1982-2000 we experienced a secular bull market: in that period, stocks offered a return if you bought and held for the duration. (Click to enlarge)

S&P 500 from 1982 to 2000: A Secular Bull Market

Source: finance.yahoo.com

But since then? We have been in what I call a secular bear market. As you can see below, an investor who bought into an index that tracks the S&P 500 as this trend began in 2000, has experienced a negative return. And based on the typical length of a secular bear, we could have several more years to go in this trend.

S&P 500 from 2000 to 2010: A Secular Bear Market

Source: finance.yahoo.com

And it’s not just over the last 30 years that this cycle has occurred. We can look back over the last century and see a continuum of secular markets, with bear trends starting in 1901, 1929, 1966, and 2000.


Source: Thechartstore.com

Because long-term market trends are riddled with cyclical bear and bull markets, there are plenty of opportunities for gains... investors just have to watch for them because they occur in the short-term. This is why a buy and hold approach doesn’t hold up in a secular bear market.

So now what? As I said months ago after this steep market rally, it might be a good idea to lessen your risk in your retirement portfolio. Wait for the downtrend to reverse and start back up. When the S&P 500 fell below the 200 day moving average, it was a signal to raise cash. Historically this has been a good indicator of a reversal.


Source: finance.yahoo.com

And that sell signal was reaffirmed by a spike in the Chicago Board Options Exchange Volatility Index (VIX), also called the "fear index". This gauges investors’ expectations of future volatility, and on May 21 it spiked to 48.20 intraday…a level we haven’t seen since the market lows of March 9, 2009.

Source: finance.yahoo.com

Get your shopping list ready when the downtrend reverses. Looking forward, the best opportunity for earnings growth domestically will be in small and mid-cap value stocks. As a reminder, look at SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) and iShares S&P SmallCap 600 Value Index (NYSEARCA:IJS). Both are good options for tracking small and midcap indices.

Disclosure: Positions in MDY and IJS. Rezny Wealth Management may hold investments in above mentioned securities; positions can change at any time.

Source: The End of Buy and Hold ... And Hope