In the year 2000, the S&P/TSX 60 index peaked at about 700. Two years later, it had dropped in half. It took almost four years to get back up to 700. That's a rate of return of 0% over six years. Then it went a bit higher in '07 and '08 before the wheels fell off again and it dropped 40% in four months. In October '08 it had dropped below 600. Now our long term buy and hold investors had a negative return after eight years of holding.
Buy and Hold is obsolete now. The financial dynamics of the 1980s and 1990s have changed. The long term up trend is over. Investors have to adjust to the new reality.
The stock market is a wonderful place to invest because it offers us a liquid market that is easily accessible by ordinary investors. From 2003 to 2007, the S&P/TSX60 doubled in four years. That's a compound annual rate of return of about 18%. When it goes up, the stock market is a great investment. The losses come if you don't know when to sell.
At CastleMoore we manage people's life savings. Our clients can't afford to be invested in the stock market when it goes down. They can't afford to wait six years to break even because they were not advised to sell out. We like our clients to own stocks when the stock markets are going up and NOT when the stock market is going down. "Know when to sell" is important to us.
Old fashioned investment managers will tell mutual fund investors: "Don't worry, the stock market always comes back. And maybe it will. But how long will we have to wait to break even this time?
The fact is that for the first eight years of this century, investment managers have made management fees and commissions on Canadian Equity Mutual Funds; but their clients have lost money.
That's why knowing when to sell is so important.