I wrote this to her this morning, so I thought I’d share in case it may be of some use to those of you who follow this blog:

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The thing about long-term investing; at any given time, you can ALWAYS find 2 “experts” who have the exact opposite opinion on what to do. Is the market poised to go up or is it getting ready to go down, should I put my money in this market/sector, or should I put it over here? Etc, etc.

When you go to practically any Financial Advising company, invariably they will eventually show you the following Ibbotson chart espousing the wonders of the long-term buy & hold approach. They all say things like: If you were to have invested $1,000 in 1925 before the depression, it would have grown to be over 10,000,000 now, an annual compound interest rate of over 12.7%!! Therefore, when you are young, just put your money in the market and let time, and these averages take care of you.

And if you are looking to retire in 75 years, then they would be 100% correct. But most of us are looking 20-40 years out so it makes sense to look at the chart in a little different light.

You’ll be hard pressed to find an advisor who will show you something along the lines of the following chart, I’ve taken the liberty of marking it up a little bit:

Bottom line is that the markets tend to move in 18-20 year cycles called Secular Trends. These trends alternate between Bullish (Upwards) and Bearish (Downwards to Neutral).

During the Bullish cycles it is downright difficult NOT to make money in the stock market. A rising tide lifts all boats sort of deal. The two bullish cycles above are marked with B & D. Each lasted about 20 years and yielded an annual rate of return of 20%+.

The Bearish cycles of A & C were a totally different story. Say you are 40 years old and working. You have your nest-egg built up to a certain point and you are trying to figure out how much longer you’ll need to work and/or invest to be able to retire in 20 years. You go to your financial advisor, they bull up this Ibbotsons chart (The first one mind you) figure an average return of 10% (which is “conservative” they’ll say) and lo and behold it looks like you’re in great shape to be able to retire in 20 years; all you have to do is give them your money to invest for you!.

Makes one hell of a big deal where you are in regards to this cycle though whether or not that’s even close to being true or not. As you can see, the markets don’t get to a 12% average by consistently churning out 12% per year, they get there by going through feast & famine cycles.

A.) If you were to invest at the beginning of section A, at one point (during the great depression) you would have lost 75% of your initial capital. You would then have to have had the balls to stick it out another 12 years just to see your holding get back to break even, and you were probably jobless to boot which means that you had probably long since spent the remaining 25%! If you had invested near the top of the cycle around 1929, you would have lost 84% of your capital! Even IF IF IF you had held on to everything through thick & thin and realized your average 3.5% return over the 20 year period at the end, inflation averaged 3.0% during that same period so you really only made a real .5% return over the 20 year cycle.

B.) Then came the next secular Bull market. Good times for all as no matter when you invested your money, you most likely turned a profit. Corrections were minor and short lived and rallies were grand.

C.) Amidst the euphoria of cycle B, everyone’s thinking it’ll last forever “This time it’s different”. After yielding 20%+ over the past 20 years your financial advisor starts telling you that now 15% return is “conservative” in their calculations. But what if you are that 40 year old person who hopes to retire in 20 years? Not only is your investment not yielding close to 15% per year, but at one point its actually down 40-60% from its high! After 18 years, the cycle ends in 1981 and the markets have yielded an average annual return of 1.61%. After 3.0% inflation is considered, you have lost 1.4% in buying power in the last 18 years!

D.) Then comes the tech rally which was really one hell of a ride. Our parents were very fortunate to be the benefactors of this cycle leading into their retirement years. 2000-2001 the bubble burst though and the markets showed their first real sign of weakness in 20 years. Since then they’ve managed to climb back up to the same range they were in at the end of the tech rally, but 5 years have passed without a new high.

So that’s a quick crash course in macro stock trends. Does this mean the Secular Bull is at an end and Secular Bear is at hand? As I said above, at any given time you can find someone to tout either side of the coin but Secular Bulls do end and historically they end in about 20 years. People can and do choose to believe that “this time is different” and they back up their belief with perfectly logical reasons but personally, I think we’re in the beginning of the next Secular Bear market that will last for another 10-15 years where the markets will be hard pressed to give away any easy gains. That’s not to say that you can’t profit in such an environment, for there are a number of ways that you can, but it is much more tricky and difficult than during a Bull cycle where EVERYBODY is a financial genius.

The good news is that you and I are young. Like our folks, we should have a nice secular bull market to look forward to as our retirement years approach; we just have to get to it.

There are a few ways to make money in a Secular Bear market.

1.) One way is to know how to Short Sell. Short selling is a way to make money when stocks or the markets go down. What you do is sell X for $100 now and buy it back later when its price drops to $70, pocketing $30. Short selling is touted as being much more risky than buying (or going Long), which is why 95% of the general public doesn’t do it, but that is completely untrue. With just a little bit of knowledge of some simple money management principles, it can be a valuable tool to your trading/investing arsenal especially during bear markets when that’s really the only way to make a profit.

2.) Another way is to simply stand aside until the next Secular Bull Market. Since the real money is made during the secular bull markets, you could simply invest in Long Term government bonds which tend to out-perform the stock markets during Bear Markets and wait a decade or 2 till things pick back up again.

3.) Look at the charts above again, specifically look at sections A & C. If you could go back in time and invest $1,000 within each of those cycles which 2 days would you pick? With hindsight you’d pick the bottom right??? Buying at bottoms is quite possibly the most difficult way to make an easy profit that will ever present itself in the stock markets. If you had bought at the bottom of Cycle A, and held to the end of cycle A, your annual rate of return over those years would have been 17%+. But how do you know when you’re at the bottom? You don’t. But the way to invest like this is to have a pile of cash set aside to take advantage of any big drops. IE: If the market drops 30%, invest 1/3, drops 40% then invest another 1/3, and if it drops 50% then invest the remainder. This would get you in at an average of 40% UNDER the high which should be retraced by the end of the cycle (This is a concept known as averaging down).

4.) Dollar Cost Averaging: same principle as above, just do it always. This is what financial advisors will tell you about over and over again. Buy some at the top, buy some in the middle and buy some at the bottom. That way over time, your average cost is lower than it would be when the price invariably goes back up. This is the principle involved in the whole 401(k)/Long Term Investment planning and it has great merit. But for those who are willing to invest the time, the potential for much greater return exists.

5.) Pick stocks, sectors, & markets that ARE going up and put your money there: Even during Bear cycles there are always sectors and stocks that are going up. Given the right analysis and time, it is possible to find these. But it is difficult and taxing work, work that your typical financial advisor doesn’t have the desire nor motivation to endure; they get paid to sell and to yield you the same returns as everyone else; no risk, no responsibility, no fault for being wrong.

What to do:

I say implement all 5 strategies. The younger you are and the less you know about investing and the other options in general, the greater % of your investment should be devoted toward # 4.

This is where it boils down to risk tolerance and asset selection. Every person varies in the degree of risk they are willing to take, but the more you do, the more you make, period. People in, near, or at retirement should seriously consider moving the majority of their $ into Gvt Bonds and taking their 5%+ on most of their funds, (Option # 2).

Us younger folks have the luxury of being able to stick our necks out there a little more for we have the time to recover if we’re wrong or get unlucky.

Young Folks during a Secular Bear Market:

· I’d say: 30-50% should go into averaging down (Option # 4).
· 15-25% in cash for Option # 3
· 10-20% in Gvt Bonds (Option #2)
· Whatever’s left in Options # 1 & # 5