The Great Bear Market of 2000 - 2003

While Wall Street professionals kept saying over and over again "buy and hold and never look back...buy and hold and never look back," the market then proceeded to wipe out $8 trillion of investors wealth over the next three years.

Almost unbelievably, it was during those depressing bear market years when investors lost so much money and confidence that those same Wall Street professionals who preached "buy and hold and never look back!" were making their biggest salary bonuses in history. We now know why they didn't want you to look back!

If you think the 2000-2003 bust was an anomaly you'd be wrong. In fact for 21 months between 1973 and 1975 there was a similar 50% decline in stock prices that would have required a similar DOUBLING of prices just to get back to breakeven. The bottom line is there's simply no reason for having to accept the risk of sitting through those protracted bear markets.

TABLE I

Table I shows the TSP funds (including the L Fund proxies) awash in minuses during this period. Only the numbers for the risk metric (Ulcer Index) show high value numbers (when they should be low)!

The TSP Pilot Standard Portfolio's annualized gain of 11.4% during the 2000-2003 bear market (Table I) was largely the result of a series of professional systems based market timing decisions to shift allocations from the TSP stock funds to the TSP bond funds.

While all of the typical passively managed TSP L Funds tracked here (via proxies) provided less risk and smoother performance during this tough bear market than did any of the individual TSP stock funds, all TSP funds and portfolios failed to even approach the positive performance numbers and low risk exposure superiority of the TSP Pilot Portfolios.

Perhaps more importantly, while dramatically reversing the declines in TSP account values in those stock funds during the bear market, the total risk of having been in the market, as measured by TSP Pilot's maximum draw down (Mdd) of only -5.7%, was similar to that for the conservative/low volatility TSP 2010 L Fund proxy for the same period invested mostly in bonds!

In fact Table I shows that the UPI measure of total risk adjusted performance was actually positive for the TSP Pilot Standard Portfolio while all others were always in the negatives during this period.

TSP Pilot is successful because its effective fund timing and fund selection criteria usually place you in the right funds at the right times--not always, but most of the time. As it did in 2000-2003, TSP Pilot will dramatically reduce your future market exposure and risk during important market down cycles. It preserves your retirement funds while reducing the volatility of your account.

For example, there was no "miracle" stock fund selection or allocation that accounted for most of TSP Pilot's Standard Portfolio anualized return of 11.4% during the 2000-2003 bear market. In fact the case can easily be made that fund timing (choosing the right time to be invested in a fund) is a more powerful tool than fund selection (choosing which fund to be invested in)--especially in a portfolio as limited and closely correlated as are the five funds currently available in the Thrift Savings Plan.

Not only would TSP Pilot investors have avoided the devastating 2000-2003 bear market losses in their portfolios, but they would have been invested in the TSP stock funds for most of the previous years of the historic bull markets of the 1990's. Those historic pre-2000 profits would have been preserved rather than squandered throughout the 2000-2003 market bust.

Don't think the only severe bear market in recent memory was the 2000-2003 debacle. From its peak in January 1973 the S&P 500 index fell over 45% in value before bottoming out over a year and a half later. It took 3 l/2 years to just get back to its January 1973 levels.

In fact, without adjusting for the relatively high dividends of the time, it took 7 1/2 years until mid-1980 before the S&P 500 finally returned to its January 1973 levels. For those 7 1/2 years investors who had followed even simple intermediate to long term trend following systems would have re-allocated their assets to bonds or another investment medium and avoided the lion's share of that bear market's severe damage.

A buy-and-hold investor would have needed to summon up enormous staying power to sit through those years and do nothing while watching hard earned portfolios steadily erode, day after day and month after month.

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