As a child my mother used to tell me those timeless words when I would want what I wanted when I wanted it and couldn’t have it. “Buy-and-hold” stock market investors are probably tired of hearing those words about now. The S&P 500 Index has declined nearly 50% from its peak. With the global financial crisis continuing to unravel world economies, not many people are comfortable making bets about how long it will take to break even this time around

Everyone has heard about the US stock market crash of October 1929, but few people remember that it took 25 years for the market to recover to its former peak.

Japan’s stock market – the world’s second largest – peaked in 1989. It has been nearly 20 years and the level of the Japanese stock market is just 20% of its peak value.

Today I looked at the education accounts I set up for my grandchildren. I use a form of buy-and-hold called “dollar cost averaging” where so many dollars per month are automatically deposited into each child’s education (529) account. Unfortunately, I don’t have the choice of following the Sage Investment Strategies Timing Model. Instead, the deposits are invested in a “target date” fund that is automatically adjusted to invest more conservatively as the child’s 18^th birthday approaches. My grandkids’ accounts have lost more than 35% of their value and I wonder how long it will take those accounts to break even. Maybe they will never make any money, depending on how many years it takes the market to come back.

The only way I have ever consistently made money in the market is to unemotionally follow my own mechanical timing model. Before developing my model I tried others’ timing models and was not happy with the results I got. The owners didn’t explain the model’s historical drawdown or standard deviation – only how much money I could have made if I had only been smart enough to find them 20 years ago. After following their timing signals I took a bloodbath when the market turned. I found out the hard way that their positions were too concentrated – not well diversified – and that the portfolio value could fluctuate wildly. Once again I learned the old saying “Patience is a virtue.”

I’m not implying that my mechanical timing model is a get-rich-quick scheme – it’s not – although looking at the recent results of the SIS Long & Short Portfolio strategy one might get a different idea! What I like about the Sage Investment Strategies model portfolios is that I sleep soundly at night without worrying about my investments. I used to worry a lot about our financial future every time a market downturn came along and we lost money.

I never had confidence in buy-and-hold as a strategy. I never had confidence in the market timing strategies of others that I tried. And I quickly lost confidence in the professional money managers I hired because they didn’t seem to do any better than me! But I am so confident in the Sage Investment Strategies Timing Model – or SISTM as I call it – that I use it to manage 100% of my own, my wife’s and my 87-year old widowed mother’s investments.

As much as it takes discipline and patience to follow a buy-and-hold strategy without wavering, one must possess the same virtues to follow a mechanical timing model. Some subscribers may be tempted to second-guess the model, especially if the SISTM generates a signal contrary to what they are feeling or expecting. Or perhaps they are following one of the SIS (Sage Investment Strategies) portfolios but maybe its performance is lagging behind other SIS portfolios or the benchmarks.

While it takes virtues of both discipline and patience to stay the course with whatever strategy one follows, I take great comfort in following a system that won’t take 25 years to break even.

Why do young investors seem to have a different approach to investing than older investors during the current bear market? Is there an investment approach that will work for both?

A recent Fortune Magazine piece titled “Advice from young investors on CNNMoney.com highlights stark differences between the reactions of older investors and young investors to the current bear market. While retired and nearly-retired investors are understandably concerned (the article says “panicking”) about their rapidly declining portfolios, many young investors see the current market as an opportunity to buy equities substantially cheaper than a year ago.

The Fortune article identifies that bullish young investors typically: (1) have few responsibilities; (2) have jobs and don’t need to live off their investments; (3) have time on their side; and (4) have faith and hope that they’ll make a killing sometime in the future.

In contrast, retired and nearly-retired investors: (1) have many responsibilities; (2) need – or will soon need – their investments to replace job income for the rest of their lives; (3) do not have the luxury of time to wait for financial markets to recover and make a profit; and (4) may need to significantly alter their lifestyle as a result of their financial losses.

Losing 50% of a $50,000 portfolio isn’t as big of a deal for a young investor making a decent income compared to a retired investor living on Social Security and portfolio withdrawals or for the investor planning to retire in a few years. For the latter two, losing 50% of a $500,000 or a million dollar portfolio forces life-altering decisions while life goes on for the young investor. Retired or nearly retired investors suffering such losses are faced with major decisions under duress, such as returning to – or staying in – the workforce, selling their home in a declining real estate market or shifting into other assets like annuities.

The Fortune article offers little in the way of advice for investors other than funneling their money into a lifecycle fund, which is typically a fund-of-funds that alters its mix of stocks, bonds and short term investments to become increasingly more conservative as an investor’s retirement date grows closer. Many retirement plans and major mutual fund companies offer lifecycle funds as a “set-and-forget” type of investment. While lifecycle funds for older investors can dampen the effects of a bear market, they still decline – just not as much as the stock market. Case in point: Fidelity’s Freedom Funds and Vanguard’s Target Retirement Funds.

Recently retired investors can take comfort that as of 11/07/2008, Fidelity’s Freedom 2005 fund is off “only” 23.89% YTD while Vanguard’s Target Retirement 2005 fund is off “only” 17.89% YTD. Nearly retired investors can take comfort knowing that Fidelity’s Freedom 2010 Fund is off “only” 24.76% YTD while Vanguard’s Target Retirement 2010 fund is off “only” 22.12% YTD. And for a young investor retiring in 30 years, you have lots of time to recover because Fidelity’s Freedom 2040 Fund is off 37.35% YTD while Vanguard’s Target Retirement 2040 fund is off 34.08% YTD. In comparison, Vanguard’s Index 500 Fund – which mimics the broad S&P 500 Index – is off 35.41% YTD.

In contrast, our 4 subscriber portfolios – which use a Global Tactical Asset Allocation strategy similar to that developed by Mebane Faber of Cambria Investment Management – have performed as follows year-to-date through 11/07/2008: SIS Diversity Portfolio: -2.3%; SIS Leveraged Diversity Portfolio: +2.1%; SIS Fidelity Portfolio: +1.5%; and SIS Long & Short Portfolio: +13.4%.

If you want a “set-and-forget” portfolio and can accept the inherent risks and volatility, then go with the lifecycle advice contained in the Fortune article. However, if you desire more consistent returns with less risk and volatility, consider one of the following alternatives – each of which involve trade-offs between your time and money:

1. Cost: Money – none; Time – high
Download Mebane Faber’s white paper here and set up your own Global Tactical Asset Allocation model in Excel. For the record, my SISTM (the Sage Investment Strategies Timing Model) builds on the methodology described in Faber’s GTAA model. This approach requires:

a. Your time to set up and maintain the model

b. The know-how to set it up correctly which involves (i) Intermediate-to-advanced investment knowledge and (ii) Intermediate-to-advanced Excel skills

2. Cost: Money – low; Time – low
Cambria Investment Management The owner of a $475,000 account at the 1.5% level would pay an annual fee of $7,125 while the owner of a $10 million account at the 0.90% level would pay an annual fee of $90,000. For the record, I don’t know Mr. Faber personally nor do I necessarily endorse his firm.

Whether you are a young investor with 30 years to retirement, an investor with a few years until retirement, or a retired investor, there are better alternatives than lifecycle funds or trying to time the bottom of the market. Choose an alternative that fits with your lifestyle, financial situation, investment knowledge and technical knowledge. Or don’t.