The S&P 500 ETF Index SPY—A Case Study

The S&P 500 ETF Index SPY—A Case Study

It is late in the year 1999. Y2K is quickly approaching. Two investors, John and Angela have each managed to amass $100,000.00 through years of investing. They both decide to invest all their money in the S&P 500 ETF index (SPY) for safety reasons.

The SPY has been growing steadily in the years running up to 1999 and people like Susy Orman recommend it. Both buy 800 shares of the SPY at $125 a share.

John is a true “Buy & Hold” investor, Angela is a “Trend Follower”.

As the year 2000 unfolds, there is no “crash”. The market continues to grow, with the SPY hitting a share price high of $153.00 in March 2000. This raises the value of both of their holdings to $122,400.00. Life is good.

The market then starts a steady decline. The fall finally ends 2 1⁄2 years later in September
of 2002 with the SPY at $80.00. John’s portfolio is now worth just $64,000.00!

Angela, being a Trend Follower, had set a Trailing Stop Loss, in this case at 15% below market or $130.00 per share (remember, the value had reached $153.00 per share). Her Stop was executed in December 2000 well before the bottom was reached and the 800 shares were sold for $104,000. (#1 on the graph below.)

At the height, each investor’s holdings were worth $122,400.00. John, our traditional Buy and Holder, therefore, has an unrealized Loss of $58,400.00! Angela, the Trend Follower, has a real loss of $18,400.00 and cash in the bank totaling $104,000.00.

The SPY starts to recover and begin an upward climb in September 2002. Angela, our Trend Follower, waits until the SPY has grown from $80.00 to $96.00 a share, or a conservative 20% gain, before getting back in the market. With $104,000.00 in cash from the prior sale, Angela is able to buy 1,083 shares of the SPY at $96.00 a share. (#2 on the graph below.)

The SPY grows slowly for 5 years. In June 2007 it reaches $153.00 a share. John is now even with 800 shares worth $122,400.00. Angela’s 1,083 shares are now worth $165,699.00.

A few months later, October 2007, the Market, and the SPY, take another very dramatic downturn as the Financial Crisis unfolds finally hitting bottom 18 months later in March 2009. The SPY is now at a low of $69.00 a share.

John road it down like a loyal Buy & Hold investor does. His portfolio is now worth $55,200.00. Angela, still a true Trend Follower, had reset the Trailing Stop at 15% below market or $130.00. Her position was sold when the price hit the stop.

Selling 1083 shares at $130.00 netted her $140,790.00. (#3 on the graph below.)

The market finally turns upward and 4 years later, March 2013, the SPY gets back to its previous high of $153.00 per share. John is back to even, again!

Angela, on the other hand, bought back in when the SPY rose 20% to $83.00. The $140,790.00 she netted from the prior sale allowed for the purchase of 1,696 shares. (#4 on the graph below.)

After more than 13 years, and two dramatic market downturns, John, our Buy and Holder, was back to even with a portfolio of 800 shares worth $122, 400.00.

Over the same time period and the same market downturns, Angela, our Trend Follower, had a portfolio of 1,696 shares worth $259,488.00.

Keep in mind that in this scenario John sat patiently on the sidelines for long periods of time waiting when in actuality there were many trending stocks looking for investors. I am deeply familiar with this scenario because, tragically, I am John! The experience convinced me to find a better way. That led me to the Trend Following Strategy and the creation of Trending Stocks.

The S&P 500 ETF Index SPY—A Case Study GRAPH

This case study demonstrates several things:

  1. Even investments considered safe such as market indexed ETFs like SPY, move
    with the market and if the market is down, so is the ETF.
  2. Trend Following can be a very conservative, successful investment strategy when a
    Risk Management strategy is followed unemotionally.
  3. The Opportunity Cost of a Buy and Hold strategy compared to Trend Following can
    be significant. John maintained an 800-share portfolio while Angela, even though
    taking a real loss at times, was still able to grow the portfolio to more than twice as
    many shares as John.
  4. Investing is a critical life skill. Like everything else, it can be learned.

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