DHHill Advisors - DH Hill Advisors

Welcome to DHHill Advisors

D.H. Hill Advisors Professional Money Management System - Our methodology focuses on dealing effectively with the cyclical effects of the stock market. Ignoring market cycles can result in devastating losses than can take decades to recover if ever. “History shows that the market typically moves in cycles. In the past 113 years, there have been four secular bull markets and four secular bear markets. Investment strategies that work in bull markets may not be effective in flat or bear markets.” This quote refers to the Dow Jones Historical Trends, but all markets and individual stocks follow a cyclical pattern. Everything seems to follow a cyclical pattern that repeats itself over time. Interest rates rise and fall, the tides of the ocean ebb and flow and the moon phases cycle between new moon and full moon. Additionally there are business cycles and economic cycles.

What is the value of understanding and applying appropriate strategies to the cyclical effects of the stock market? If an investor is able to correctly identify the market cycle, bull or bear, this would allow the investor to apply the appropriate strategy that improves the probability for success within that particular cycle. Strategies that work in a bull market may not work or could fail miserably in a bear market. Bull markets are up trending markets that tend to go up over time while bear markets are down trending markets that tend to go down over time. If the market is bullish and in a defined up trend, individual stocks, equity exchange traded funds and equity mutual funds would be appropriate to take advantage of a rising market. On the other hand, if the market was bearish and in a defined down trend, cash would be a much better place to be.

If an investor knew the market cycle was bearish and in a down trend, would it makes sense to invest or hold individual stocks or equity funds? To answer that question, a review of how individual stocks and mutual funds correlate to the broad market indexes should be reviewed. Investors Business Daily, a well known and respected financial newspaper presents evidence from their long term studies related to the correlation of stocks as compared to the market. Their studies show that three out of four stocks follow the direction of the stock market; if the market is in an up trend, most stocks will go up. Conversely, when the market is in a down trend, most stocks will fall in price. Our studies at D.H. Hill Advisors show that ninety percent of equity mutual funds will follow the direction of the market. The probabilities are an investment portfolio will be substantially influenced by the current bull or bear market cycle, regardless of whether the portfolio is invested in individual stocks or equity funds. The solution - “don’t fight the trend”.  If the market trend is down, buying or holding equities is a losing strategy.

Why bother to identify market cycles? Why not stay fully invested through all market cycles? Most financial planners recommend a “buy & hold” strategy because historically over time, the market has gone up. They recommend to get invested in quality stocks and equity mutual funds and stay invested regardless of market cycles and conditions. During bull market cycles, one could argue that a “buy & hold” investment style works. Others point to the argument that an investor could improve performance and reduce volatility by using a more active management strategy during bull market cycles. However the crux of the matter is not whether “buy & hold” works in a bull market; the real question is how does it perform in a bear market? To answer this question, let’s review the results of the last two bear market periods of the twenty-first century.

Is it a good idea to stay fully invested (“buy & hold”) during a bear market? What is the risk of being on the wrong side of the market cycle? During the years from 2000 to 2010, the stock market as measured by the price change of the S&P 500 Index, have incurred two bear market cycles that have resulted in a 48% loss during the years 2000 - 2002 followed by a 56% loss during the years 2007 – 2009. There was a cyclical bull market during the 2003 – 2007 that separated these two bear markets and partially softened the blow. However, many retirement plans were devastated, many people had to delay their retirement and many retired folks had to go back to work. Ignoring cycles is not smart when making investment decisions. 

Is “hope” a strategy? “Buy & hold” can quickly turn into “buy & hope” in a bear market. Most financial planners recommend a “buy & hold” strategy and their reasoning is that “nobody can time the market so stay fully invested regardless of market conditions”. One could argue back and forth as to why the vast majority of financial planners promote a passive “buy & hold” strategy for their clients, but the facts are clear as to the results using this approach over the past ten years and it’s not good. Buy & hold puts the investor’s money at extreme risk and the only defense offered by planners who use this outdated method is that over time, if you “hang in there, you will eventually be rewarded”. The problem is most planners began their careers during the 1980’s and 1990’s during a long term bull market where “a rising tide floats all boats”. Buy & hold was the predominant strategy taught back then and adopted by most planners. It is easy to understand that after using a simple strategy like this for one or two decades and growing a successful financial practice by teaching and recommending this approach to all their clients, that the twenty-first century’s first bear market in the year 2000 was a rude and alarming awakening. Most planners were caught off guard and had no solutions for their clients. Trillions of dollars were lost and planners left the industry in droves because of their inability to adapt to a changing market place. They ignored market cycles in the past and had no training or interest in identifying market cycles. During the 80’s and 90’s, it was main stream to use a long term asset allocation strategy and to stay fully invested. In the year 2000, the beginning of the twenty-first century, the long-term bull market of the 1980's and 1990's ended with the introduction of a secular bear market.  Markets are indeed cyclical and market cycles can last a long time. As of the summer of 2010, this secular bear market is alive and well and most investors have suffered extreme disappointment and pain over the past decade.  As mentioned earlier, over the course of the past 113 years, the Dow Jones Industrial Average has experienced four secular bull markets and four secular bear markets. Some of these market cycles have lasted for twenty-five years!  Hope is not a strategy, but when a portfolio loses a substantial amount of money over an extended period of time and all control has been give up to the market because of passive “buy & hold” strategies, “hope” does become part of the strategy. Anytime “hope” becomes part of a strategy, it’s time to change strategies. When a financial planner tells you that you must be patient and endure major bear market losses within your account in order to eventually succeed, you need to be prepared to endure extreme portfolio risk or find another planner. Our suggestion would be to look for a new advisor that does not use "hope" as part of their strategy.