After extensively studying historical stock market trends, I believe I have found the best way for the average person to invest over the long-term. The following steps are for someone just starting out on their own.
Before going through this, read and follow the steps I shared in the write-up, Pro Tips: When Should I Invest?, to make sure you are in a solid financial position to begin investing.
Order of Operations
1. Open an investment account and transfer funds into it. I like and use Charles Schwab because it’s free and easy to open accounts, no account minimums, free stock and ETF trades, and they have a solid service team with shorter call wait times than most places.
The most flexible investment account is a taxable investment account (or some call it a “brokerage account”), but IRAs are the most tax-advantaged accounts.
2. Using whatever money you want to invest, buy into ETFs that track an index. I like SPY (S&P 500), DIA (Dow Jones), XLK (Technology Sector of the S&P 500), and IWM (Russell 2000).
3. Whenever one of your holdings drops 10-15% over a period of time (whether it’s a day, a month, or a year), sell 1/4 of that holding and use it to buy into the 2x or 3x leveraged ETF equivalent. Do this for each subsequent 10-15% drop.
SPY: SSO (2x), SPXL (3x)
DIA: DDM (2x), UDOW (3x)
XLK: ROM (2x), TECL (3x)
IWM: UWM (2x), TNA (3x)
4. Sell the 2x and 3x leveraged ETFs when the index reaches its previous peak and buy back into the 1x ETFs you were originally in.
*Something to keep in mind if you are trading in a taxable investment account (not an IRA): If you sell an ETF (or stock) at a loss, then buy back in within 30 days, this is considered a “wash sale” and the loss cannot be counted for tax purposes; this rule is to prevent people from manipulating their trades to take an unfair advantage of tax law. To avoid violating this rule, buy back into a different ETF.
Why I like this strategy
There is no market-timing involved, it involves remaining fully invested, and it takes advantage of corrections and bear market drops by utilizing 2x and 3x ETFs to “double down”, so to speak. So it is better than the usual buy-and-hold strategy because it is returning more in recoveries, but returning the same throughout the rest of the year.
How This Would Have Performed in the 2020 recession
Hindsight is always 20/20, but numbers don’t lie. I back-tested the strategy for the S&P 500 ETFs between the period of 2/19/2020 (peak) and end of day 8/7/2020; the results are below.
SPY only: SPY is owned at the peak (2/19/2020) until end of day 8/7/2020
SSO only: SSO (2x) is owned at the peak (2/19/2020) until end of day 8/7/2020
SPXL only: SPXL (3x) is owned at the peak (2/19/2020) until end of day 8/7/2020
Strategy (SSO): SPY is owned at the peak (2/19/2020), but every time SPY drops X%, 1/4 of it is sold to buy into SSO; final return percentage reflects end of day 8/7/2020
Strategy (SPXL): SPY is owned at the peak (2/19/2020), but every time SPY drops X%, 1/4 of it is sold to buy into SPXL; final return percentage reflects end of day 8/7/2020
|Strategy||SPY only||SSO only||SPXL only||Strategy (SSO)||Strategy (SPXL)|
|1/4 every 10% |
|1/4 every 12.5%|
|1/4 every 15%|
According to a study done by Fidelity, since 1950, the S&P 500 has, on average, experienced a 5% pullback 3 times a year, a 10% correction once every 16 months, and a 20% decline every 7 years. Being that this is the case, one could modify my proposed strategy and exchange 1/8 or 1/10 of the ETF holding for a leveraged equivalent every 5% instead, if they would like to take advantage of the more frequent smaller corrections.
Disclaimers and Risks
This strategy does not involve investing in foreign stock ETFs, so if (when?) the US economy deteriorates and never recovers, this strategy would not do well (but we would have much larger issues to deal with…). However, the US has the best economy in the world and the structures (economic, governmental, social, etc.) in place to keep it that way.
Past performance does not predict future results.
Thank you for reading! If you have any questions or recommendations, feel free to email me at firstname.lastname@example.org or leave a comment below.