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Coping with Bear Markets Don Lansing, Chief Investment Officer
The S&P 500 Delivers a LOST Decade >30% S&P 500 DECLINE over the past 10 years Did your strategies protect you? Active “tactical” asset allocation requires a reassessment of the market environment Are stocks now cheap?  Or is another shoe about to drop?
Secular Market Cycles Market Moves in Broad Cycles lasting 15-20 years typically. Rising Secular BULL market driven by expanding P/E ratios Increasing investor enthusiasm brings in “marginal” investors. Declining Secular Bear/Flat market driven by declining P/E ratios Investor “disgust” pushes money out of the market. “ Cyclical” Markets are shorter-term market trends, e.g. 1-5 years
Secular Markets in More Detail
What This Means for Investors Secular Bull Market Maybe one year out of four is a loser with losses typically single digits. Buy and Hold works!  Just ride the wave higher. Most recent Secular Bull Market was 1982-1999 Most mutual fund managers would have “come of age” during this Secular Bull Market. Secular Bear/Flat Market About half the years are losers with double-digit losses common. Buy and Hold does NOT work.  We must adopt more ACTIVE strategies.
Do Traditional Strategies Help? Typical Asset Allocation Approach Set Allocation Targets According to Investor Objectives/Risk Rebalance to your targets: Annually or every 6 months Forces a Buy Low – Sell High Approach Setting Targets: Rule of 100 or 120 Rule of 100: 100 – Age = Equity Allocation For a 50-yr old Investor, 100 – 50 = 50% Stocks; 50% Bonds/Cash Rule of 120: 120 – 50 = 70% Stocks; 30% Bonds/Cash In a Secular Bull Market: The higher the % stocks, the better! Rule of 120 is a winner. In a Secular Bear/Flat Market: Beats the Market but returns are Mediocre.
Results of Asset Allocation 50/50 split of stocks/bonds rebalanced every 6 months   Offers some protection and outperformance, but quite mediocre UP 14% over 8 years versus S&P which is DOWN about 30%  Drawdowns still are significant due to equity exposure Growth of $100,000 Investment $60,000 $80,000 $100,000 $120,000 $140,000 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 S&P 500 Stocks and Bonds Rebalanced Every 6 Months
Why Preserving Capital Is the Key to Success You will  easily  beat the market if you can avoid or limit losses during bear market periods.
Managing Risk Preserving capital    the key to successful investing “Macro” or market risk We want to limit our exposure to weak market periods Adds performance Lessens volatility Can serve to protect other long-term assets  “Micro” or position risk We want to prevent blow-ups in a position At what point is a personal preference Tools used are a personal preference Knowledge, Maintenance, Stomach
Beware the (Cyclical) Bear “Cyclical” Bear Market Began in Early January 2008 What does this mean for investors? A strong likelihood that the market will decline by >20% and will do so in a hurry That rallies will be sharp but brief – mirror image of pullbacks and corrections in a bull market Cyclical Bear Markets Typically Last about 10-12 Months
Follow the Trend:  Invest in the Bull; Avoid the Bear
Or Be Aggressive and SHORT the BEAR
Secular Bear Markets Mean Big Loss Years Whereas Secular Bull Markets almost never have a really bad year, Secular Bear/Flat Markets have a  really  bad year a shocking 1/3 of the time! Dow Jones Industrial Average DISPERSION OF ANNUAL STOCK MARKET CHANGES Percent of Years During Secular Cycles (8+ Cycles: 1901-2008) Copyright 2003-2009, Crestmont Research (www.CrestmontResearch.com) 28% 67% 47% >+ 10% 33% 30% 31% -10% to +10% 39% 4% 21% <-10% 54 Yrs BEAR 54 Yrs BULL 108 Yrs AVG RANGE 19% 50% 34% >+ 16% 50% 50% 50% -16% to +16% 31% 0% 16% <-16% 54 Yrs BEAR 54 Yrs BULL 108 Yrs AVG RANGE
In Conclusion We are in a secular Bear/Flat market which could last for several more years.  Be alert! We are in a cyclical Bear market – so, ... You MUST protect assets first and profit second.  NOT LOSING is the key to success. Thus, you need to be more ACTIVE in your investment strategy. Protect from Market Risk: It is easy to determine when we are in bear market periods. Inverse ETFs offer a simple way to protect assets. Protect from Position Risk: In a bear market, the predominant trend is DOWN.  Actively protect ANY gains and expect uptrends to be fleeting. MarketTrend Advisors specializes in strategies that help you cope with bear markets while benefitting fully from bull periods.
M ARKET T REND   A DVISORS Win in UP and DOWN markets! Keep in Touch with MarketTrend Advisors by sending us an email at  [email_address] Take a look at our performance and ask for our regular client updates.  Together, we can beat the bear!
M ARKET T REND   A DVISORS To contact us: M ARKET T REND  A DVISORS , Ltd.   3720 Gattis School Road #800  Round Rock, TX 78664 Business hours:  Monday through Friday 8:00am to 5:00pm CST  Phone: (512) 255-8722 Fax: (512) 255-8732 Email:  [email_address]   Web site: http://www.markettrendadvisors.com
M ARKET T REND   A DVISORS Disclosure MarketTrend Advisors, Ltd. is an independent, S.E.C-registered investment advisor. We are not registered as a broker or dealer, nor do we have any partners or employees who are affiliated with any broker or dealer. See our S.E.C. Form ADV, Part II for official declarations. The information included herein is for informational purposes only and does not constitute specific investment advice. Investing in the stock market assumes risk and no assurance is made that investors will avoid losses. No representation is made that investors will or are likely to achieve profits or incur losses comparable to those shown. Performance results are shown for illustration and discussion purposes only.  Data from third parties has not been verified, however all information presented is believed to be accurate and fairly presented. All performance figures in this presentation do not include the management fees, commissions, or taxes which would reduce overall returns.  Regarding future performance: Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.  S&P 500 refers to the Standard & Poor’s 500 Large-Cap Corporations Index. The index is designed to measure performance of the broad based US market and consists of 500 American companies. This index is used for comparative purposes only. (Data is taken from http:/www.stockcharts.com.)

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MarketTrend Advisors - Coping With Bear Markets 023009

  • 1. Coping with Bear Markets Don Lansing, Chief Investment Officer
  • 2. The S&P 500 Delivers a LOST Decade >30% S&P 500 DECLINE over the past 10 years Did your strategies protect you? Active “tactical” asset allocation requires a reassessment of the market environment Are stocks now cheap? Or is another shoe about to drop?
  • 3. Secular Market Cycles Market Moves in Broad Cycles lasting 15-20 years typically. Rising Secular BULL market driven by expanding P/E ratios Increasing investor enthusiasm brings in “marginal” investors. Declining Secular Bear/Flat market driven by declining P/E ratios Investor “disgust” pushes money out of the market. “ Cyclical” Markets are shorter-term market trends, e.g. 1-5 years
  • 4. Secular Markets in More Detail
  • 5. What This Means for Investors Secular Bull Market Maybe one year out of four is a loser with losses typically single digits. Buy and Hold works! Just ride the wave higher. Most recent Secular Bull Market was 1982-1999 Most mutual fund managers would have “come of age” during this Secular Bull Market. Secular Bear/Flat Market About half the years are losers with double-digit losses common. Buy and Hold does NOT work. We must adopt more ACTIVE strategies.
  • 6. Do Traditional Strategies Help? Typical Asset Allocation Approach Set Allocation Targets According to Investor Objectives/Risk Rebalance to your targets: Annually or every 6 months Forces a Buy Low – Sell High Approach Setting Targets: Rule of 100 or 120 Rule of 100: 100 – Age = Equity Allocation For a 50-yr old Investor, 100 – 50 = 50% Stocks; 50% Bonds/Cash Rule of 120: 120 – 50 = 70% Stocks; 30% Bonds/Cash In a Secular Bull Market: The higher the % stocks, the better! Rule of 120 is a winner. In a Secular Bear/Flat Market: Beats the Market but returns are Mediocre.
  • 7. Results of Asset Allocation 50/50 split of stocks/bonds rebalanced every 6 months Offers some protection and outperformance, but quite mediocre UP 14% over 8 years versus S&P which is DOWN about 30% Drawdowns still are significant due to equity exposure Growth of $100,000 Investment $60,000 $80,000 $100,000 $120,000 $140,000 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 S&P 500 Stocks and Bonds Rebalanced Every 6 Months
  • 8. Why Preserving Capital Is the Key to Success You will easily beat the market if you can avoid or limit losses during bear market periods.
  • 9. Managing Risk Preserving capital  the key to successful investing “Macro” or market risk We want to limit our exposure to weak market periods Adds performance Lessens volatility Can serve to protect other long-term assets “Micro” or position risk We want to prevent blow-ups in a position At what point is a personal preference Tools used are a personal preference Knowledge, Maintenance, Stomach
  • 10. Beware the (Cyclical) Bear “Cyclical” Bear Market Began in Early January 2008 What does this mean for investors? A strong likelihood that the market will decline by >20% and will do so in a hurry That rallies will be sharp but brief – mirror image of pullbacks and corrections in a bull market Cyclical Bear Markets Typically Last about 10-12 Months
  • 11. Follow the Trend: Invest in the Bull; Avoid the Bear
  • 12. Or Be Aggressive and SHORT the BEAR
  • 13. Secular Bear Markets Mean Big Loss Years Whereas Secular Bull Markets almost never have a really bad year, Secular Bear/Flat Markets have a really bad year a shocking 1/3 of the time! Dow Jones Industrial Average DISPERSION OF ANNUAL STOCK MARKET CHANGES Percent of Years During Secular Cycles (8+ Cycles: 1901-2008) Copyright 2003-2009, Crestmont Research (www.CrestmontResearch.com) 28% 67% 47% >+ 10% 33% 30% 31% -10% to +10% 39% 4% 21% <-10% 54 Yrs BEAR 54 Yrs BULL 108 Yrs AVG RANGE 19% 50% 34% >+ 16% 50% 50% 50% -16% to +16% 31% 0% 16% <-16% 54 Yrs BEAR 54 Yrs BULL 108 Yrs AVG RANGE
  • 14. In Conclusion We are in a secular Bear/Flat market which could last for several more years. Be alert! We are in a cyclical Bear market – so, ... You MUST protect assets first and profit second. NOT LOSING is the key to success. Thus, you need to be more ACTIVE in your investment strategy. Protect from Market Risk: It is easy to determine when we are in bear market periods. Inverse ETFs offer a simple way to protect assets. Protect from Position Risk: In a bear market, the predominant trend is DOWN. Actively protect ANY gains and expect uptrends to be fleeting. MarketTrend Advisors specializes in strategies that help you cope with bear markets while benefitting fully from bull periods.
  • 15. M ARKET T REND A DVISORS Win in UP and DOWN markets! Keep in Touch with MarketTrend Advisors by sending us an email at [email_address] Take a look at our performance and ask for our regular client updates. Together, we can beat the bear!
  • 16. M ARKET T REND A DVISORS To contact us: M ARKET T REND A DVISORS , Ltd. 3720 Gattis School Road #800 Round Rock, TX 78664 Business hours: Monday through Friday 8:00am to 5:00pm CST Phone: (512) 255-8722 Fax: (512) 255-8732 Email: [email_address] Web site: http://www.markettrendadvisors.com
  • 17. M ARKET T REND A DVISORS Disclosure MarketTrend Advisors, Ltd. is an independent, S.E.C-registered investment advisor. We are not registered as a broker or dealer, nor do we have any partners or employees who are affiliated with any broker or dealer. See our S.E.C. Form ADV, Part II for official declarations. The information included herein is for informational purposes only and does not constitute specific investment advice. Investing in the stock market assumes risk and no assurance is made that investors will avoid losses. No representation is made that investors will or are likely to achieve profits or incur losses comparable to those shown. Performance results are shown for illustration and discussion purposes only. Data from third parties has not been verified, however all information presented is believed to be accurate and fairly presented. All performance figures in this presentation do not include the management fees, commissions, or taxes which would reduce overall returns. Regarding future performance: Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels. S&P 500 refers to the Standard & Poor’s 500 Large-Cap Corporations Index. The index is designed to measure performance of the broad based US market and consists of 500 American companies. This index is used for comparative purposes only. (Data is taken from http:/www.stockcharts.com.)

Editor's Notes

  1. Let’s begin by discussing the challenges individual investors face. Most of us have a pretty strong emotional component in our makeup. Unfortunately, these emotions are our greatest enemy when interacting with the stock market. I have a client who watches his portfolio every day – that’s not unusual, of course. And almost every day he has some comment to send me about it. When the market has a big up day, he wants to know why we don’t have more stocks and whether we should add some. Then, the market drops and he wants to know why we have so MANY stocks and whether we should sell some. This type of emotional reaction to the market wears the poor guy out (and sometimes me as well!). Indeed, even his doctor has told him to stop watching the market. But he seems unable to. Left to his own decisions, this fellow, who is a smart guy perfectly capable of investing well, would be jumping in and out of the market all the time. The results would be, and have been at times, disastrous for his portfolio. More unfortunately, many studies have found that my friend here is not the exception but the RULE when it comes to individual investors. Individuals react emotionally to the market and make their decisions accordingly. They overtrade, buy when they should sell, sell when they should buy, and so on. As a result, many of them give up in frustration as they fail to make any money in the stock market. This morning, I will present an investment strategy that tries to help us avoid these common problems. It’s a simple strategy that requires just a couple of rules and keeps you from suffering from years like 2008 will benefiting from the good years.