In last article we analyzed the behavior of the virtual investments during the main bear markets happened in period 1971-2020.
We could see how a "Buy&Hold" strategy applied to the S&P index has lead to massive drawdowns, and slow recoveries.
For example, after topping in March 2000, the S&P has lost 47.6% of its value in 2003, and slowly returned to the orignial value in 2007.
But then another bear phase hit the S&P and it crashed for a -56.3% from top of 2007, and did not recover the previous to until march 2013.
During these 13 years of blood and pain, I doubt that any investor have been really holding the investment and wait. A big loss has much more likely happened.
Compared with the B&H strategy, the HST model variant 5 (with no leverage) has shown much better performance. It
- has reduced significantly the suffered drawdowns
- has reduced significantly the time before recovering the previous tops
- has given a much better yield on average
Now we want to show the behavior of HST model variant 2, using 3x leveraged ETFs as $TQQQ and $UPRO.
Here are detailed pictures of the the same bear periods:
- In the upper graph of each picture the red line is the HSTv5 (no leverage)
- In the lower graph of each picture the green line is the HSTv2 (3x leverage)
The responses are similar in shape for variant 2 and variant 5, but different in magnitude: the HSTv2 (3x leverage), compared with the HSTv5 (no leverage) showed
- bigger drawdowns
- usually longer times to recover new tops after crashes (because of the greater magnitude of the drawdowns)
- much better final yields at the end of the recovery period
Bottom Line
Now we can answer to our original questions:
“if a bear market like on of the past ones is starting tomorrow, am I ready to face it ?"
"Am I ready to accept this magnitude of drawdowns without panicking ?”
Every investor should have made up its own opinion, but we can agree about these points:
- Buying and hold the S&P is not an acceptable strategy, because it could crash and give us huge drawdowns (-47% -56%).
It tipically takes 2 / 7 years before recovering back the previous tops.
Average annual yield has been +7.4% in the last 49 years - If we can accept a drawdown on our invested capital of -15% / -24%, the HST model variant 5 (no leverage) is the right approach.
In worst cases it recovered back the previous tops after 2 years or less.
Average annual yield has been +17.0% in the last 49 years - If we can accept a drawdown on our invested capital of -35% / -55%, the HST model variant 2 (3x leverage)* is the right approach.
In worst cases it recovered back the previous tops after 3/4 years or less.
Average annual yield has been +52.1% in the last 49 years
* this a very risky strategy anyway, for which we suggest to dedicate a minor part of the invested money
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Important note: past performance is not indicative of future results.
