Student Comment: If Recent Annual Returns Are 20%, Is Buy-Only Better? If Returns Are 7%, Should We Sell Before a Crash and Buy Back?

[Student comment] If recent annual returns are 20%, is a new buy-only strategy better? If annual return is only 7%, should we sell before a major crash and buy back? Easy Investment Chat CLEC Investment Channel. Post date: June 01, 2020

Reply:

In a bull market, annualized return is usually around 20%.

A bear market happens about once every ten years and falls 40%.

Combining the above: nine years of gains turn $1 million into $5 million, then a 40% decline turns it into $3 million. That means in ten years, $100 rises to $300, an annualized return of 11.6%.

Because you take 3% per year, or $30,000, for living expenses, annualized return becomes 8.6% (11.6% - 3% = 8.6%). After deducting $30,000 per year in living expenses from $1 million, there is still $2.28 million after ten years when the bear market arrives.

So we do not know when a bear market will happen. Therefore there is no such thing as what you described: if recent annual returns are 20%, a buy-only strategy is better; if annual return is only 7%, then sell before a major crash and buy back.

We know nothing, so there is no sell-and-buy strategy, because we do not know when to sell.

Our only strategy is to keep emergency living reserves, invest the rest whenever we have money, hold long term, and never sell until we need money. When we need money, sell only the amount needed.