Time to say goodbye to the highs?

Investment Insights

Mike Jones

When the market begins to flirt with all time highs I get a little nervous. As good as it feels, one can’t help but wonder if market highs are to be appreciated or if they are only signaling the beginning of the end.

Any seasoned investor knows that good times are filled with tough decisions. For example, you could sell everything knowing that:

  1. “Markets don’t go to the moon.”
  2. “You can’t go broke taking a profit.”
  3. “At these valuations there is no way you can make any money going forward.”

I know, I know. I have heard all of this and thought most of it myself back in 1996. And then what happened? The market went up and up for 3 plus more years. With that in mind, I thought that this month I would share with you some interesting facts about market history and market behavior.

What I know:

At some point in time over the last 100 plus years ALL of the G-7 countries have experienced at least one period where stocks lost 75% of their value. That is not good. And, the mathematics of a 75% decline requires an investor to realize a 300% gain just to get back to even. How hard is that? It would mean that you would have to compound your investment return at 10% for 15 years just to get back to even. Not an easy thing to do.

Take a look below at the chart of pullbacks from high water marks on the S&P 500 since 1908. Drawdowns of 10%-20% are fairly frequent, with 30%- 40% drawdowns less so. The large 1920s bear market dominates the figure with a drawdown of over 80%.

Source: Faber, M. (2013, February 1). A Quantitative Approach to Tactical Asset Allocation. Retrieved November 15, 2016, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

Source: Faber, M. (2013, February 1). A Quantitative Approach to Tactical Asset Allocation. Retrieved November 15, 2016, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

I became convinced many years ago that I could not predict the market’s direction. I could, however, overlay a technical indicator called a moving average (averaging a number of days in the market to establish a reference point and trend line) to give me a clear picture of the overall trend of the market.

One of the most frequently used measures of trend in the technical analysis community is the 200-day simple moving average (SMA). In his 2008 book Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, Jeremy Siegel investigates the use of the 200-day SMA in timing the Dow Jones Industrial Average (DJIA) from 1886 to 2006. His work leads to a conclusion that using trend analysis can improve the absolute and risk-adjusted returns over buying and holding the DJIA.

By using trend analysis I can monitor the portfolio models that I oversee at Argent. When trend lines are broken I can look statistically at the historical risk of each portfolio and make necessary adjustments. One study which covered the market between 1901 and 2008 determined that the S&P 500 becomes 69.6% more volatile when it is trading below its 10 month moving average. That fact alone prompts me to do what I can to minimize that volatility.

mike signature small

Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Mike Jones is Managing Director / Investment Group of Argent Advisors, Inc. Write to either at 500 East Reynolds Drive, Ruston, LA 71270 or call (318) 251-5800. This newsletter is available via email on a free subscription basis. You can subscribe by clicking here. Direct any questions, comments or suggestions to Byron Moore at bmoore@argentadvisors.com or to Mike Jones at mjones@argentadvisors.com.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Argent Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Argent Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.
Argent Advisors, Inc. is a registered investment adviser registered with the Securities and Exchange Commission. Argent Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. Argent Advisors, Inc does not offer tax, legal or insurance advice. If you are a Argent Advisors, Inc. client, please remember to contact Argent Advisors, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Argent Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.


Argent Financial Group

Celebrating its 30th anniversary in 2020, Argent Financial Group (Argent) is a leading, independent, fiduciary wealth management firm. Responsible for more than $30 billion in client assets, Argent provides individuals, families, businesses and institutions with a broad range of wealth management services, including trust and estate administration, investment management, ESOPs, retirement plan consulting, funeral and cemetery trusts, charitable organization administration, oil and gas (mineral) management and other unique financial services. Headquartered in Ruston, Louisiana, Argent was formed in 1990 and traces its roots back to 1930.

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