SubscribeStrategy Lab: Don’t Buy and Hold a Bad Strategy
December 3, 2008
For many people, this has been one of the most difficult times of their lives. Both in the U.S. and abroad, people are living under a cloud of uncertainty about their future financial position. I know this because I have been inundated with e-mail from people asking for help.
People are hurting.
Two recent e-mails read in part:
“My sister suggested I contact you. My investment account has lost an incredible amount of money and my ‘advisor’ is clueless what to do. I am down $385k from over $600k. Please contact me so that I can provide you with the information so you can review.”
“My husband and I are currently living in Eastern Europe. I am not a U.S. citizen, but he is. He had significant investments and savings in the U.S., but they have lost a lot of value recently. We need the help of a financial advisor/planner to make sure we do not lose our savings for our kids, retirement, etc.”
These are not the exception, by any means. In fact, for the past year, my team and I have been working to change the mindset of investors who have been indoctrinated into the buy-and-hold club. You know, the one that tries to prove that all other investment strategies are worthless and are likely to lose massive amounts of money.
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5 Responses to “Strategy Lab: Don’t Buy and Hold a Bad Strategy”
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Buy and Hold has worked from the mid-1940’s until 2000. The reason is obvious but most people this it has worked forever. The MAIN reason that it worked is that the largest US population group in history came to be. The Baby Boomers. They also came with a savers mentality created from lesson’s in the 20’s and 30’s.
The buy-hold also worked due to 401K and IRA programs. ERISA programs. Well, now a few major trends are ending. Baby Boomers are not in max earning years, but rather retirement preparation. And they are being FORCED to withdraw monies from 401Ks and IRAs, due to ERISA. These two trends coming together will manifest as redemptions and sales of equities. The next big wave will be the Echo Boom. After current market events I wouldn’t be surprised to see the Echo Boom being a generation of big savers. And if we implement new industry and policy in the US (Green Revolution & Industry) we may be able to create a very similiar long term bull market. At that point we may see buy and hold to come back in vogue. But there is a large chasm to cross (2009-2016)
Allow me to apologize for my incredibly poor grammar in the previous comment. Yikes that was badly written. Hopefully the point came across. In short, many headwinds face the market. Many of which are not being talked about.
Similar headwinds face the housing market. The artificially low home lending rates announced today may artificially stabilize the housing markets for the short run, but a long term fall in housing prices in inevitable. It will allow the next generation of home buyer to afford property. And that is actually healthy in the long term.
I feel that part of the problem is that people are trying to find one method that will always work. Times change and the investment methods employed should adapt to the changing times. Unfortunately most advisors, let alone individual investors, lack the foresight and understanding to know when they should change or to know what they should change to.
Buy and Hold?
I am aggravated by the advisors and mutual fund companies who do little more than preach “buy and hold.” They will show you data proclaiming the wonderful returns that you would have missed out on should you have missed the best X-number of days in a market. While what they say is factual, the presentation is extremely biased. An investor should keep in mind that the people telling you to “hold on” or “stick with it” are the same people who only get paid on what you have invested. Where is the data that shows the returns if you missed out on the worst X-number of days in a market? I’m not suggesting that investors should try to time the market. If they do then chances are that they will loose in the long run. Instead, investors should consider learning a wise and disciplined investor’s strategies on hedging and cutting losses. Even Jeremy Siegel, the author of the buy and hold bible “Stocks for the Long Run”, concedes that there can be market inefficiencies that can be exploited.
–MB
“Forgive them, for they know not what they do”
I bash financial advisors quite a bit but the truth is that I too am a financial advisor.
Even at the better brokerage houses, which embrace open architecture and have top notch research, the trainee advisors are instructed that they should spend no less than 80% of their time marketing themselves. These trainees come from all walks of life and VERY few have any financial education or investment background. I wonder how the trainees are expected to learn proper investment disciplines and methods if all they are ever doing is marketing. Financial advisors are all trained to sell. Very few are properly trained to manage money.
There are good advisors out there. I wish people the best of luck in trying to find one of them.
[...] It is as good as any headline looking to catch the attention of anyone who is grasping for reasons to stick to a plan that caused major financial (and psychological) pain over the past 12-months. The concept of Buy-and-Hold, the brainchild of Warren Buffett, has been bastardized by the asset gatherers who believe that it really means: buy-and-hold-no-matter-how-much-money-you-lose. (Also see Don’t buy and hold a bad Strategy) [...]