David Rosenberg on Buy and Hold

by: Richard Shaw

In today’s market comments (03/11/2010) David Rosenberg of Gluskin Shef, said.

“When we look at the last 12 years, dating back to LTCM and the bailout that ensued, we have endured a 60% rally, followed by a 50% selloff, followed by a 100% rally, followed by a 60% selloff, followed by a 70% rally. … this is a great case for active portfolio management, also a lesson that investors will not lose out by going long after a 50% collapse from the high; nor are they likely to feel much pain from selling into a 70% rally from the low. ….”

He supported that statement with this chart:

click image to enlarge

Virtually everybody knows that the return on the S&P 500 has been pretty much flat for the past 10-12 years, however hiding in money market funds is not a good long-term solution, and neither is an all bond portfolio (unless you are in a very late stage of life).

He did not detail what he meant by “active management”, but it is somewhat clear that he did not mean active stock selection or sector rotation. He meant owning stocks when they are rising and not owning them when they are falling — either by switching the intended stock allocation to bonds or by holding near-cash when the stocks are falling (unless you are a trend follower with shorts).

Some would call that “market timing”, which is a pejorative label in many people’s minds, but when extended periods of many months or a few years is the interval between being IN or being OUT, we think “trend following” is a more accurate label.

Sitting around all day trying to scalp a few ticks or a few points as a day trader, is playing in the realm of nearly random price gyrations. Making decisions about intermediate and long-term trends and positioning accordingly (either In or Out, or Long or Short) is outside of he realm of random price gyrations, as these two 20-year S&P 500 monthly charts illustrate (a Bricks chart and a Simple Moving Average Cross-Over chart):

Brick Chart (time independent)


Moving Average Cross-Over Chart (time dependent)


Three Primary Asset Categories:

The biggest issue is not whether you have the right choice of funds or stocks, but whether you have the right mix of the three basic asset types: “Loans,” “Ownership” or “Reserves.”


For some, rebalancing between the three categories within a fixed or collared allocation range will probably work; and for some others moving the Loan or Ownership assets into and out of risk with Reserves as default will likely work too; as this chart of the Dow Jones Corporate Bonds Total Return index and the Dow Jones Composite (stock) Total Return index suggest (stocks in black and bonds in red):


This Dow Jones US Asset Allocation chart also suggests the value of rebalancing, and perhaps of moving into and out of key asset categories on a major trend reversal basis (chart shows five stock/bond allocations labeled for the percent of stocks in the mix: 100, 80, 60, 40, and 20):


Relevant Securities:

Stock ETFs that related closely to these charts are SPY, IVV, VTI, IWB and IWV. Bond ETFs that relate closely to these charts are BND, AGG, and LAG.


In the current and recent stock market environment, a straight Buy & Hold strategy is too risky for those investors who have essentially completed the accumulation stage of life and who cannot replace major asset losses that may persist for years, or for those who are or are about to rely on their assets to support lifestyle. Some kind of dynamic movement into and out of, or between, the three major asset types is a potentially effective risk moderating approach.

Holdings Disclosure:
As of March 11, 2010, we hold SPY and BND in some, but not all managed accounts, We do not have current positions in any other securities discussed in this document in any managed account.

Opinions expressed in this material and our disclosed positions are as of March 11, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

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