Though it may seem pretty straightforward to buy when the model says it’s time to buy and to sell when the model says it’s time to sell, things are not that simple when human psychology gets involved.
These simple recommendations may help you get better results whether you follow our model or another investment strategy.
Be prepared for bad times
Beat The Dow model was created in 2003. All data presented for the years before 2004 is a backtest of the model.
Since its inception in 2003, the model weathered very well one of the most difficult period in investment history. We believe that the model will continue beating the Dow Jones Industrial Average on the long run. However we may be wrong: though the investment model worked in the past years, it may not work in the future.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
When times are bad and the model leaks your money, you may be tempted to walk away. You need to know that it is in this kind of times that the model tends to perform best, when everyone thinks it’s time to step aside.
For instance the model had a position of 2 during the month of March 2009. That’s when nobody wanted to be in the market. The model declined in the first days of the month. Then the bottom was reached: $1 invested at the start of the year on the DJIA was worth $0.75 while $1 invested following Beat The Dow was worth $0.83. It was already better to follow Beat The Dow than to be invested in the DJIA.
Then the market bounced back: In May 2009, $1 invested at the start of the year on the DJIA was worth $0.94 while $1 invested following Beat The Dow was worth $1.45. That is, Beat The Dow bounced back by close to 75% while the DJIA rebounced by a mere 25%.
Do not take too much risk
Please do not risk all your wealth with our strategy. After a couple years, you will probably have much profit from following the strategy. However do not increase your exposure to an unreasonable level once your trust increases.
For some investors, it may seem reasonable to invest all your stocks on the strategy, since its risk is limited to a maximum leverage of 2. It may be wiser to invest half of your stocks in the strategy and rebalance at the end of the year and see where it leads you.
1929 – 1932
These have been the worst years for the stock market.They are also the worst for Beat The Dow model:
$1 invested on the Dow Jones Industrial index at the start of 1929 peaked at $1,27 in September 1929. However this same $1, still invested in the DJIA, is worth $0.20 at the end of 1932. If instead you had invested this $1 with Beat The Dow model, it would have peaked at $1.49 in October 1929. However this same $1, still invested with Beat The Dow, is worth $0.10 at the end of 1932.
You would have had to wait until 1934 for Beat The Dow finally to catch up with the Dow Jones index. The same happened in 1936 – 1938 when $1 with the DJIA was worth $1.06 at the end of the period while $1 with Beat The Dow was worth $0.60 at the end of the period.
Since 1946 included, Beat The Dow missed it’s goal of beating the Dow Jones index only 14 of the 68 years, by an average of 6% per year. To put this in perspective it must be added that, since 1946, Beat The Dow has beaten the Dow Jones Average 54 of the 68 years, by an average of 27.5% per year.
Beware of leverage
It is strongly recommended to have enough capital and not use leverage when the model position is 1. Leverage should only be used for the periods when the model position is 2. Otherwise your cash could be wiped out by a strong fluctuation of the market.
Last: the very good news
The very good news: Beat The Dow Model is weakly correlated with the Dow Jones Industrial Average index. Which means that managing part of your portfolio following Beat The Dow strategy will likely decrease the general risk of your stock investment.
The level of correlation is measured by the R-Squared ratio. For Beat The Dow, this ratio is close to 50, better than most mutual funds. It means that often Beat The Dow goes up when the market goes down.
This is excellent news for all you folks who do not enjoy bear markets!