I came across an interesting article earlier that is sure to be the subject of much controversy.
NOTE: The article is not written by me - just copy and paste - source at the end of the post. However, I find the article interesting enough to post it here on GQ. I'm looking forward to hearing your different opinions! ☺
A few minutes to read, but especially for those who are already aiming for financial freedom in their mid-30s or 40s, the investment horizon until the start of the withdrawal phase is not so long after all, so a few aspects of the article may be worthwhile 😉
Key message: The "buy-and-hold" strategy can be a good option for young investors with smaller investment accounts
accounts and an investment horizon of over 30 years can be a good option. For shorter investment horizons, "time" is not on your side.
Here we go... from here on, the article is no longer mine:
Here are some typical research headlines, perspectives, as well as quotes designed to give the impression that the buy-and-hold strategy is the only option for investors:
- If you miss the best ten days of the market, you also miss half the growth.
- Why you miss the best days of the market if you sell when volatility is high.
- If you want to make money in the stock market, you don't have to do anything - just hold your investments.
- It's the time, not the timing, that matters.
Before I focus on the actual content of this article, I would like to make a quick comment. I think the buy-and-hold strategy can be a good option for young investors with smaller investment accounts and a 30+ year investment horizon. However, if you are close to retirement or already retired, "time" is not on your side.
In bear markets or recessions, the buy-and-hold strategy becomes the buy-and-hope strategy, and hope does not belong in any investment portfolio. If you want to withdraw capital during this time or need it to fund your retirement, your problems will worsen and suffer from "return risk" which is most damaging to planning for the "golden years".
So why does the financial industry do this? Well, the system is designed to manage money in a simple way, it's designed to sell to the masses over generations - and you're supposed to "just" leave your money in the market for 10, 20, 40 or more years with minimal adjustments while paying management fees.
For a technical trader and investor like me, AUM stands for "Assets Under Managed". Even my 13-year-old daughter could invest 60% of a portfolio in an index ETF and the other 40% in a bond fund and then check once a year to see if rebalancing is needed. You don't have to be a genius to do that. I know investors who pay more than $35,000 a year in advisor fees and lost about $750,000 in 2022 because they followed so-called "professional advice"
Multimillionaire investor Jim Rogers once said:
"Diversification is an invention of stock brokers to protect themselves so they don't get sued when they make bad investment decisions for their clients, and that you can go broke with diversification."
Another reason why the advisory industry puts out content like this is that to the average investor, it looks like the diversified buy-and-hold strategy is the philosopher's stone for managing money when all the experts praise this method to the skies. In reality, however, diversification is the best way to ride out volatility and achieve status quo returns like any other investor who is ignorant of technical analysis and asset rebalancing methods or who has been misinformed.
To go back to one of the lurid headlines mentioned above: If you want to know when the best days in the stock market are and how this can change your future, then you should read this article. It's easy to think that these are the days when stocks shoot up in a bull run - but is that really the case? Turns out it is... and it isn't.
Chances are your account is on the upswing in a clear bull market, no matter what strategy you use, whether diversified buy and hold, technical analysis, fundamentals, etc. This is a time when many investors relax the rules and choose not to lock in their gains, but instead try to dramatically increase their returns.
Or they fail to put in protective stop levels, thinking they can worry about it later when the price weakens. Then, when that downturn inevitably sets in and is confirmed in the news, most investors apply risk control measures at that point, such as a stop-loss order, to protect their money. Unfortunately, by this time it is often too late.
I would like to briefly and urgently point out that it is NEVER a good idea to put off protecting a position and your capital until later. It is ALWAYS better to place a protective stop first after entering a position and to control the risk. Life is full of nasty surprises and they happen quickly in the markets. It can then become very expensive if you are unable to close a position.
In a bear market, the situation is not quite so clear. Let's take a moment to examine the following result:
"About 42% of the S&P 500's strongest days have occurred in a bear market over the past 20 years. Another 34% of the market's best days occurred in the first two months of a bull market - before it was even clear that a bull market had begun."
Source: Ned Davis Research, quoted by Hartford Funds
An investor who can weather the storm that the buy-and-hold strategy creates during a bear market is likely to cling to those days of the big rally as if it were a life preserver. In my view, however, the problem is that the life preserver is not attached to anything. There is no dock, no ship, no land and no one to pull you to safety. You are the only one bobbing through the waves of events.
Will the environment always be this rough? That is rather unlikely. If you hang in there long enough, the tide will eventually turn and the stock market will eventually rise again. Your accounts will recover and the day will come when you break even. Time will pass, your portfolio will reach new highs and you will think, "May the good times never end!" The memories of financial ruin, hopelessness, fear, stress and anxiety will fade and the cycle will begin anew.
That sounds like a great rollercoaster ride, doesn't it? In reality, I believe that the industry has brainwashed investors and that they are all suffering from Stockholm syndrome. But I won't go into that here.
Let's take a few minutes to look at the above quote and see if it's worth holding stocks during the big rallies in a bear market. Considering that 76% of the strongest stock market days occur in bear markets and during the early stages of a stage 1 bottom, this should be the first warning sign that the financial industry is preaching things that may not deliver what they promise.
Think about it. During a bear market, when prices are falling 1-5% a week for many months, it doesn't matter if there is a 5-10% rebound if the price is still lower than it was before the slide began. You are still losing money and all these short term recoveries do is give panicked investors false hope that the market has bottomed and a new bull market is starting.
The same goes for the industry's claim that dividend reinvestment is a great, low-risk way to build wealth. Again, this story is just a smokescreen. If the price of a security plummets by 30%, is a dividend payout of 2% comforting and wealth-building? Will it make up for the huge drop in your savings when you really need your money? By investing in dividend shares, you achieve the return of the status quo.
Here is an example of a specific investment scenario. I'm working with the assumption that a $1,000,000 account has been invested in a diversified portfolio of assets that tracks the performance of the S&P 500 index. The investor followed the buy-and-hold strategy during the market peak of the dot-com bubble and held on until the break-even level was reached many years later.
The dot-com crash began in March 2000 and lasted until October 2002, during which time the S&P 500 fell by around 49% from its high to its low. In this case, the S&P 500 Index did not reach its March 2000 peak until September 2007, some seven years later.
Based on the same account and portfolio data as above, investors had one month, ONE MONTH, to cheer the return to their previous account high of $1,000,000 before heading back down. This time the S&P 500 fell about 57% (a loss of $570,000) from its peak in October 2007 to its low in March 2009. This time, the market did not fully recover to its pre-crisis level until March 2013.
Unless you were one of the lucky few who switched to a different approach in September or October 2007 and shifted into cash or used a strategy that allowed you to profit from the declining market, it took them 13 years to break even. A 13-year pickle period is more than just painful - it's life-changing and a real nightmare for someone who has retired or is about to retire.
As an aside, if you don't know what a market slump is - I've been horrified to discover that many active investors don't understand it. There are two types of dips you need to know about.
Today, in the volatile stage 3 market phase we are in, we may not see the peak we experienced in 2022 for another 3, 7 or 13 years. Capital protection and active asset management are a must for investors over the next few years... unless you like the rollercoaster rides outlined above.
During this 13 year nightmare there have been a few days of big price rises and the financial industry led us to believe that this was a cause for hope, if not celebration. None of these events were significant as they all occurred at a time when investments were already showing a loss. The only time missing big rally days causes you to fall back a little is during a raging bull market when stock indices are making new all-time highs. Those are the real growth rallies.
Final thoughts
In short, all these bear market rallies did was provide a glimmer of hope, even if there was nothing to support that glimmer of hope or make it sustainable. They served as an exhortation to "hang in there and things will get better" and then fizzled out without accomplishing much more than that. Did the buy-and-hold strategy work? Yes, sort of - but it lasted about 4,700 days. When you're retired, that's a very long time to wait for income and growth... and a very long time to live in fear and worry.
Source: Buy-and-Hold - Erfolg durch Geduld, oder Scharlatanerei? | Investing.com
Author: Chris Vermeulen
Edit: Link to an older post of mine on risk and money management - also fits to this post https://getqu.in/knevje/vHXuB5/
