It seemed like for over a decade many retail investors forgot that bear markets exist. It was always assumed the market would continue to trudge higher...forever. Yes, those in the know understand the pain of bear markets, but for many that haven’t truly experienced a bear market, with their own capital, well, the last few months have been a rude awakening.
But the part that truly fascinates me, is the neglect to realize that buy and hold isn’t always the answer to long-term investing. Yes, I am a buy and hold investor. But I’m also an options trader that works my trades round my current “buy and hold” positions. I understand no one has a crystal ball and by using options I can choose my own direction (bullish, bearish, sideways), probabilities for success on each trade, and most importantly, have the ability to choose my own risk. These are the concepts that I want everyone to truly grasp.
Many, many, years ago I came across an incredible infographic on the performance of the stock market. Every, and I mean EVERY, investor or options trader should take a look at this infographic before investing another dollar. Because once you do, you’ll immediately begin to change your investment outlook. But, more importantly, how you will invest going forward.
“In Investing, It’s When You Start and When You Finish”
Ed Easterling, founder and president of Crestmont Research, published an eye-opening infographic that has changed the way informed investors approach the market, forever.
Source: Crestmont Research: The New York Times
What Mr. Easterling’s data displays is simple, the buy and hold strategy that most investors are accustomed to following has major holes. Holding securities for the long haul isn’t a guarantee of profitable results. Results depend on “when you start and when you finish.”
The example in the New York Times article states, “after accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.”
I know, it’s a fairly simplistic table, but don’t let that hide the fact that it’s incredibly powerful.
Basically, markets are unpredictable. And results, with the traditional buy and hold approach, are completely dependent on timing. Extreme volatility is normal and should be expected even over time frames as long as 20 years. Remember, we don’t have a crystal ball, no one can predict future market results. But we certainly don’t have to sit on the sidelines and hope for the best. We have the ability to take our fate into our own hands by using intelligent, statistically based strategies that offer defined risk.
Now I’m not here to trash a buy and hold strategy. There are legitimate reasons to use a dollar cost averaging, buy and hold approach.
But I also understand that investors now have access to investment strategies that were once only available to professionals. Strategies that allow us to make money in any type of market; bullish, bearish or neutral. Strategies that are based purely on statistics, probabilities, a mathematical advantage.
The barrier to entry is practically nonexistent at this point.
What investors need to realize is that investing isn’t all about buying and holding … hoping for the best. It’s not about diversifying. Investing is about eliminating volatility, smoothing out your equity curve while allowing yourself to make a return regardless of market direction.
This is why I use options.
Options allow me to make money in any type of market, while defining my overall risk. Better yet, as a person who values statistics over hunches or a crystal ball approach, I am able to choose my own probability of success on each and every trade I place. So, even if I’m wrong about my directional assumption, as an options trader, I am still able to make a return.
This is why you are here. You are interested in doing the same.
My entire goal of Crowder Options is to not only educate the individual investor and options trader on how to properly use options, but to offer ideas, research and a resource for all things options.
Again, if you have any questions, please feel free to email me or post your question in the comments section below. And don’t forget to sign up for my Free Weekly Newsletter for weekly education, research and trade ideas.