I compared what happens to the stock position over the period of time if
1) one does NOTHING
vs
2) one sells on the way up, maintaining the original amount invested in
equity and keeps profits in the account and loads on the way down using the
same principal - always maintaining
the original amount invested in equities.
Here is the Exhibit A:
Chart of SPY from July 3 2006 to present
SPY
and the comparison spreadsheet
SPY2006-Present
Use MSIE ONLY, Firefox doesn't support tables.
I'll go over a few lines in details, they are all the same in all exhibits.
On July 3, 2006 we invested $100,000 in SPY @126.61 and got 790 shares
3 months later, and we adjust positions every 3 months
SPY was 135.01 so we sold 49 shares to maintain original $100,000 invested
and put $6635 profit in cash.
We also collected dividend which brought the total value of the account to
$6635 cash, $457 dividend and $100,000 value of stock to the total of
$107,115
We repeat the same thing over and over again.
By Dec 31 , 2007 SPY dropped to 141.31 and we had to take $9329 from our
cash reserve and buy additional 66 shares to maintain $100,000 original investment.
On Dec 31st 2007 our position was:
Cash from realized profits - $11,970, 708 shares of SPY, total SPY position
$100,000, with $1827 in collected dividends for the total account value of
$113,796.
Market keeps on falling, so let's jump to 9/29/08.
By that time, doing the same thing over and over again we have:
SPY at $110.34, we had to put additional $12,643 from the pocket to
maintain $100k original investment position, all trading profits are gone
and the total account value with dividends received is:
$103,452 for a loss of $8079 and we have 906 shares after we made
additional $12,643 investment while position of "do nothing" has $9227 loss
but without additional investment.
By 3/30/2009, the bottom of the market,
we had $36,641 additional investment, $31,750 loss and 100k in SPY while
the "Do Nothing" position had $71181 in SPY, no additional investment and
$28819 loss.
Things looked brighter after that and doing the same thing over and over
again to the present day, our position is
749 shares of SPY which is worth $100,000, $21,818 in cash (trading profits plus dividends)
for the total of $121,818 compared to $113,229 of "Do nothing" position.
In less than 5 years our trading strategy gained us $8589
Let's compare how would we fair if we entered the market a year later, when
SPY was almost at the top of
152.98
You can follow the line by like transactions at
Exhibit B
end results:
SPY lost 19.47 points (12,7%)
Our position with dividends is up $1546 with $6088 additional investment
(max additional capital at the worst point was $56,064)
compared to loss of $7283 of "Do Nothing" position.
I also ran few Mut Funds I have to see the results in the same time frame.
WASAX -
present position $132555 (gain of $32555) with max additional capital
required of $18190
compared to $125384 of Do Nothing position.
FNIAX -
present position $110216 (gain of $10216) with max additional capital
required of $42241
compared to $103465 of Do Nothing position.
CRSAX -
present position $115103 (gain of $15103) with max additional capital
required of $25647
compared to $98855 of Do Nothing position.
I also took one ugly chart of FAGIX, Fidelity Growth and Income fund from
5/2/1998 (ALL TIME HIGH of $10.60) to 11/21/2003, 5 1/2 years to see what happens:
FAGIX Chart
Here what happened: FAGIX Table
results:
present position $110438 (gain of $10438) with max additional capital
required of $57059 (Much less in reality, as fund pays monthly dividends,
so after deduction of dividends the max capital was only $28699)
compared to $100753 of Do Nothing position.
But that's not all.
Here is the ULTIMATE QUESTION:
How would we fare in the... GREAT DEPRESSION of 1929 - 1935????
Here is the chart, the time frame when Dow plummeted from 381.17 to a measly 41.22
and here is the table:
I made a few assumptions for the lack of data:
1) you buy and sell Dow
2) Dividends are less than 2% of the value
GREAT DEPRESSION Dec 1928 - Dec 1935
present position $118897 (gain of $20585) with max additional capital
required of whopping $145776 ( $135344 if you take dividends into consideration)
compared to $62146 of Do Nothing position, loss of $37854
We not only survived the Great Depression but also made some decent coin in 7 years!!!!
Here is another study:
On May 31st I sold some mutual funds I was holding since the beginning of 2000 and took about 33% loss on those "Do Nothing" positions.
Out of curiosity, I ran the scenario of one waking up on January 3rd, 2000, no Y2K issues, very optimistic, and put $100,000 into QQQ which was flying at the moment sky high.
If I used "the formula", I'd be ahead by $8125 (QQQ has notoriously low dividends)
while the "Do Nothing" position, just like my mutual funds,
is losing $33466
(Use MSIE for this table)
Summary and deep thoughts:
0) Don't guess where the markets are going, let markets tell you what to do!
1) Try avoiding entry near the top
2) Be disciplined and "just do it" without trying to guess where it will
go. In history of US stock market any decent index investing will break you
even at worst if you follow this strategy.
Dividends are your big friend.
3) have cash reserves for future purchases, you'll definitely need them
unless you picked the out most bottom
4) NOTHING (indexes or decent Mut Funds) goes up or down in the straight
line, THIS IS THE ONLY THING WE CAN PREDICT WITH 100% certainty.
5) violatility is your friend, embrace it. Volatility will make you money
in any given 7 years.
6) if we have revolution and all goes to ZERO, it will not be relevant how
much money you lost, $2000 or $2000 mils, as all will go to shit anyway.
I only wish I discovered this 10 years ago. I'd be laughing in 2008 rather than
sweating bricks.
Serge Birbrair, May 30th 2011