All of the major markets are in extreme overvaluation territory creating extraordinary risk of loss. But this has been true for years so why the warning now? Discover the 4 symptoms that separate bubbles that burst from simple overvaluation, and find out how current market conditions stack up. Are we on the precipice of a collapse, or are we at the beginning of a sudden, final price acceleration? This complete analysis will give you all the facts and show you how to manage your risk of loss for the inevitable fall around the corner…
Contrary To Popular Belief, Buy And Hold Isn't A One-Size-Fits-All Investment Strategy.
The appeal of buy and hold investing is simplicity.
Buy and hold requires little intelligence, skill, or serious effort, and it completely ignores the essential investment concept of managing risk.
Buy and hold's allure is as old as eternity - get rich with little or no effort. Just mindlessly make your monthly deposits, don't blink when the market tanks, and eventually you will emerge rich.
The preachers of the buy and hold gospel are supported by several well documented, academic studies showing that a diversified portfolio of stocks never lost money when bought and held for twenty years or more.
They also teach the idea that buy and hold stocks outperforms other investments such as bonds, real estate or cash equivalents over the long-term. That much is true.
And if you take what they say at face value then the case for buy and hold may seem compelling.
Unfortunately, it's not what they tell you that's the problem - it's what they don't tell you about buy and hold that will cost you money.
"If you want to make money, really big money, do what nobody else is doing. Buy when everyone else is selling and hold until everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investment." - J. Paul Getty
Below are some of the inherent flaws in buy and hold logic that will hopefully make you think twice about this sacred cow of investment strategy and investigate deeper with an open mind:
- Buy and hold makes no sense because it implies the risk of assets is always justified by the reward. The idea that every year is a good year to own stock is patently false. The facts are well researched and proven that the risk of buying and holding securities is not justified by the reward under certain conditions (and these conditions are completely knowable without the benefit of hindsight).
- Buy and hold implies that prices don't matter because the strategy requires you to buy and hold at all times regardless of price or valuation. Is there any other buying decision in your life where price doesn't matter? Of course not, so why should investing be any different?
- Buy and hold uses dynamically composed investment indexes (S&P 500, etc.) to support the case for a static investment strategy (buy and hold). The truth is more stocks have vanished or gone to zero than have survived to this day. That is why the very indexes used to support the research for buy and hold do just the opposite - they sell and replace stocks regularly. Why would you do any different?
- There exists a mathematically implied optimum holding period for securities based on transaction costs and volatility, so how can a "no transaction" strategy like buy and hold make sense? It implies zero transaction activity is optimal which is mathematically false.
- Buy and hold is a purely offensive investment strategy that ignores the defensive half of the investing equation - risk management. It implies risk is something to be accepted rather than controlled. How can buy and hold make sense when it is only one-half of a complete investment strategy?
- Buy and hold is passive. If the passive approach isn't an effective strategy for advancing your career, developing satisfying relationships, raising productive children, maintaining health or any other important aspect of your life, what makes you think it is an effective approach for investing?
"The wild swings of real markets means you have to build a wider margin of safety than conventional theory holds." - Benoit Mandelbrot
These are just a few of the logical flaws hiding behind the buy and hold myth. There are many more.
The following articles will introduce you to some of the research and statistics on buy and hold that your broker never showed you.
- 6 Reasons To Become Your Own Financial Expert: Discover how the consensus view of buy and hold for the long-term works to the advantage of investment advisors - not investors. Learn the conflicts of interest hiding behind investment advice so you can make smarter, more profitable investment decisions.
- Don't Even Consider "Sound-Bite" Investment Advice Without Knowing This: Uncover the deceptive contradiction between media sound-bite investment advice and the inherent complexity of investing so that you aren't deceived.
- Which Type Of Investor Are You? Take This Test - Your financial security depends on the type of investor you are. Learn how you can advance your investment strategy to the next level.
In summary, Financial Mentor does not oppose the buy and hold investment strategy. We just oppose how it is marketed as an all-weather, all-condition investment solution when the research supports it as a special case investment strategy that should only be used when conditions are appropriate. Learn the facts so that you can decide for yourself.
Below you’ll find a listing of our most recent articles about the buy and hold investment strategy providing you with additional information so you can take the next step...
The investment marketers and media give us simplistic, free investment advice because that’s what sells best. It’s what people want regardless of whether or not it’s profitable. However, the cheapest investment advice can be the most expensive. Discover why personal finance should be simplified, but investing should not be. This knowledge will help you sort good investment advice from bad and make you a better investor…
I need your help please!! I’m trying to understand what bugs you about investing. I want you to rant and share your frustrations. Seriously! The reality is I live in a very different investment world than most people. If I’m going to help you then I need to know your problems – right now – please. Get your voice heard because I promise to read every single comment (several times) and take notes. It’s really simple. Please just answer one of the following…
What does the bond market today have in common with the stock market in 1998-2000 and the real estate market in 2006-2007? They were all ridiculous bubbles that ended very badly for investors. This is not a prediction. It is simple risk vs. reward analysis based on valuations. It is something that can save your portfolio from massive losses when you understand how it works. Learn how…
A reader commented on my blog, “Todd, my portfolio is mauled. I feel stuck and don’t know what to do. Any suggestions?” The simple answer is problems like this are avoided through a disciplined investment risk management strategy and the damage will be repaired only after improving your investment risk management skills. Every day you face a decision to buy, hold or sell. When you make no decision you effectively choose to buy your portfolio that day because it keeps the risk…
I’m a really dumb investor. If I had to rely on my brain and reasoning power to make investment decisions I would be dead broke by now. That is why I test all investment theories before ever putting a dime at risk. Amazingly, what I have learned is how little of the prevailing investment wisdom is really true. Even more surprising is how profitable investment strategy shares one thing in common…
Did you know that nearly all the stock market gains from 1983-2007 came from just 25% of the stocks? Similarly, 75% of stocks contributed zero performance on average and the average stock actually lost money – during one of the greatest bull markets in recorded history. If you want to pick stocks that outperform the averages or develop a greater understanding of trend-following risk management techniques for your investment portfolio then this is a must read…