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The market is back where it was a dozen years ago — but...

The Big Picture website provides this illuminating chart of the S&P 500 Index over the past 12 years:

The site notes that the S&P 500 closed on Dec 31, 1998 at 1229.23. That's just 11 points below its close last Friday of 1240.40. Eleven points — in 12 years!

Naturally, a chart like this is quite persuasive in the hands of an advisor pushing market timing, or "tactical asset allocation," or any of the other nuances that seek to move investors in and out of the market. It seems so obvious that such an approach must be better than a buy-and-hold approach.

As the Big Picture's Barry Ritholtz explains:

Over the course of these dozen years, we have seen a 68% rally (to the 2000 top), a 50% sell off (March '03 lows), a 104% rally (October '07 top), a 58% drop (March '09), and an 83% move up (April 2010 highs).

The fee-driven industry continues to push buy & hold as the investing strategy of choice. I prefer to adjust my risk exposure relative to multiple inputs, one of the major aspects of which is Trend.

Of course, some academics will argue this point, but the chart above speaks volumes.

It is indeed difficult to defend a general buy-and-hold approach in light of the past dozen years. However, not all buy-and-hold approaches are created equal. I'm not criticizing Ritholtz here, but many people assume buy and hold equals a specific indexing approach or a strategy of buying certain "special" funds or stocks and holding them forever, come what may.

SMI's flagship strategy, Fund Upgrading, is different from either of these approaches. It is definitely buy-and-hold, and yet it is relentlessly active in its management of the underlying funds it recommends, requiring its adherents to check their holdings every month. Upgrading also makes no attempt to move investors in and out of the market.

Contrary to what the above chart might imply, Upgrading's version of buy-and-hold has been quite successful — despite the fact that the overall market has gone nowhere. Far from the 0% return implied by the chart, Upgrading has delivered a gain of roughly 165% over the past 12 years. That's approximately 8.5% annualized. In a perfectly flat market.

(You can review the 1999-2009 numbers yourself using this Performance History. This year, Upgrading is running about 3% ahead of the overall market, as measured by the Wilshire 5000.)

The next time you see or hear someone disparage buy-and-hold investing, keep in mind that there's more than one kind of buy-and-hold approach. Yes, if you had bought an S&P 500 index fund and held it for the past 12 years, you would have done poorly. However, that does NOT mean you necessarily have to subject yourself to the perils of market timing in order to succeed.

Someone who ignored the market's dramatic bull and bear markets over the past 12 years and simply kept on Upgrading would have done quite well — without the emotional roller coaster of constantly wondering if they needed to exit or re-enter the market.

Learn more about Upgrading by signing up for a FREE 30-day SMI Web Membership. This special end-of-the-year offer is good only through Dec. 31, so sign up today!

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