Trader says buy and hold is dead . . . until it's not
Mr. Kee hasn't exactly been enthusiastic about buy-and-hold for some time, but now he is offering more evidence to explain why. He is telling anyone who will listen about research he conducted back in 2000 that led him to develop investment strategies based on an economic measure called "The Investment Rate." The investment rate measures the demand for new investment in the economy – it tracks the amount of new money that is flowing into various equity markets, including stocks, bonds and real estate. His theory is that when new money flows into the economy, it drives the markets higher, and when money is being sucked out of the economy, the opposite is true.
In an interview with DailyFinance, he used his research to make a prediction: "The investment rate model tells us that the demand for new investments peaked in 2007, and measured from December 2007, it says that for the next 16 years, the amount of new money available to be invested in our economy will decline progressively every year."
Such a colossal economic slide has only happened twice before in history -- during the Great Depression and the stagflation period of the 1970s. Mr. Kee warns: "This is just the beginning of what could be, in my opinion, a greater depression."
So what does this mean for investors? Mr. Kee says investors can't rely on money managers, mutual funds or other investments when the long term cycle is trending lower. He points out that over the past ten years the market is down 37%, which places us in a long-term period of time when the market really hasn't gone up. Add his prediction about the years leading up to 2023 and he says:
Let's be rational . . . the market does go up over time, so 30 years from now the money managers are going to be able to come back and say 'see I was right.' But who really has 30 years to sit on a losing investment?
For investors who are looking at the current market rally and thinking they can buy low now and hold on as the market fights its way back to higher levels, Mr. Kee cautions that just as the markets experienced a long-term upward trend from 1981 to 2007, the markets have now entered a downward economic cycle that he believes will span from 2007 to 2023. He says traditional buy-and-hold strategies don't work well when the investment rate is declining and the market is trending lower. Instead, he says investors must pay closer attention to their investments, buy on the dips in the market and focus on controlling their risk. He says halfway through the 16 year downward cycle – about six or seven years from now – will be the time to start looking at buy-and-hold again.
Until then, his advice:
Mr. Kee specifically advises investors to consider using the Proshares short double-weighted (QID) and long double-weighted (QLD) exchange traded funds to take advantage of the market trending lower.
He says investors should not listen to "market noise," but instead focus on reacting to the growth trends that they have identified and have confidence in. The idea is that investors should buy and hold for shorter periods of time rather than the traditional three years or more that most financial advisers advocate. While he acknowledges that moving in and out of investment positions can be viewed as risky, given the current volatile environment, he believes it can't be any more risky than sticking to the traditional buy-and-hold strategy.
When you weigh Mr. Kee's dire market prediction and his advice against the reality of what has just happened over the last year and a half, there is a substantial take-away for investors. Since Mr. Kee's website business has a significant audience of day traders, it's not surprising that he might endorse just the the type of proactive, trade-oriented strategy that he has. But if spotlighting the short-comings of the buy-and-hold strategy gets investors to start thinking differently about how they invest their money and encourages them to be more proactive about investing their funds, it may just help them find ways of keeping their investment dollars more secure in the long run.
After all, we've seen what doing nothing, relying on financial advisers and staying invested as a major market downturn ensues has done for investor returns. Could having a larger population of more proactive and hands-on investors do more damage to portfolios than the millions of passive investors did to themselves in this latest downturn? Chances are, a good portion of them could have made out a bit better.
Whether Mr. Kee is right or not about his prediction that the markets will be trending downward until 2023, every investor has to ask themselves, "How will I invest my money during the worst market conditions in my lifetime?"
You can either buy-and-hold, or take control.