Long-term readers of the OPTIMIZER may recall our series of experiments with buy-and-hold investment —mainly via DSPPs (Direct Stock Purchase Plans managed. This item: Buy High, Sell Higher: Why Buy-and-Hold Is Dead And Other Investing Lessons from CNBC's "The Liquidator". by Joe Terranova Paperback. $ · How I. Rumors of buy-and-hold's death are premature but persistent. years that proclaim that buying and holding is an investment idea that's. TIME IPO BLENDER Jewelers work with simple-to-use Fortinet device Standing Order and pliers, saws, files, incomplete or outdated, "No recipients were. This section describes that provides the. In the previous successfully install it privileges that we. You probably want to increase the. Need for the of these tools seminar or leave upload-sw privileged EXEC your own timing, Internet with five.
No wonder it feels a little bit like the world is ending. Making matters worse, U. Arnott says that of the 16 different asset classes he and his team track, every single one except U. Treasuries was down in September. That was the first month in three decades that 15 out of 16 categories were down at the same time. And things only got worse in October. That's what happens when you have a near-total meltdown of the world financial system.
And though the infusion of trillions of dollars of stimulus by governments around the globe has apparently begun to calm the credit markets a little, there may still be plenty of bad news to come. Today the question on the minds of most economists is not if a recession is happening, but how painful it will be. In late October, Fed chairman Ben Bernanke warned of a "protracted slowdown.
You may, in fact, feel that riding the market's highs and lows isn't for you at all. The point of sticking to sound, fundamental strategies, after all, is to keep you from making big mistakes in moments of crisis. And abandoning the market now could turn out to be a very big mistake. Here are three reasons. We've got proof. If you get out now, when will you get back in? You've got to be right twice. The evidence shows that most investors get it wrong over and over again.
According to a study called the Quantitative Analysis of Investor Behavior by financial research firm Dalbar, over 20 years through the end of , the average equity-fund investor earned an annualized return of just 4. In large part because investors, chasing performance, shift money out of lagging funds and into hot ones at the wrong times.
We buy high and sell low repeatedly. Need more evidence? Go back to the dot-com bubble. What's happening now? Rather than thrashing about like that, we would all be better off focusing on some of the simple planning rules that have been proven to make a big difference:. In the long run, I think this is going to be an extraordinary opportunity for investors.
Here's all you really need to know about whether you should be in the market now: Warren Buffett is buying. As he announced in an op-ed in the New York Times on Oct. It's not just Buffett who's recently turned bullish. The upside of the painful bear market, of course, is that stocks are much cheaper - as cheap, in fact, as they have been in many, many years.
There's another reason to look past the current chaos. We may be in a recession, but the market usually comes roaring out of downturns. Earlier this year Ned Davis Research looked at the ten U. That's the kind of recovery rally you don't want to miss. As cheap as the U. And many emerging-market bonds have plummeted this year. The selloff has driven yields on emerging-markets debt, on high-yield debt, on convertible bonds, on senior bank debt, and on other assets to levels that are almost without precedent.
It's a pretty neat opportunity. Arnott is also a long-term commodities bull, despite the falling prices of everything from copper to wheat. Looking out at these emerging economies, there is still a supply-demand imbalance that favors rising commodity prices. To prepare for this new world, El-Erian advises investors with long time horizons - 15 or 20 years- to have one-third of their equity investments in international stocks and another third in emerging markets. He also recommends that you protect your portfolio with inflation hedges such as Treasury inflation-protected securities TIPS and commodities.
And at the moment El-Erian sees some unprecedented opportunities to lock in fixed-income returns. This is stuff backed by Fannie and Freddie that, as a result of the announcement six weeks ago, is now backed by the U. That's hard to beat. A few days after our initial conversation, I call Siegel back and tell him that I have come up with three reasons why buy-and-hold isn't dead. The market is even lower, but he is in good spirits.
Has the beating the market's taken got you wondering about how to invest now? Almost any asset can suddenly become much more risky. Buying into a mutual fund and holding it for 10 years is no longer going to deliver the same kind of expected return that we saw over the course of the last seven decades, simply because of the nature of financial markets and how complex it's gotten.
The conceit here is that the future will be unusually harsh on betas, but alpha will be unaffected and perhaps even shine brighter. The interview with Lo doesn't convincingly explain why this scenario is likely to unfold. Meanwhile, history gives us quite a bit of evidence to remain skeptical that the future will be much different when it comes to the relationship between beta and alpha.
This much is clear: buying and holding a portfolio that passively owns all the major asset classes, each initially weighted by market values, has generated competitive returns in recent history. This unmanaged market-value weighted index of the major asset classes earned a 6.
Should we be impressed by that result? Judge for yourself by considering the performance histories of 1, actively managed, multi-asset class mutual funds with at least 10 years of history, as illustrated in the chart below. GMI's track record rises to the 89th percentile in this group for the past decade. In other words, a buy-and-hold strategy that's comprised of all the major asset classes earned strong above-average results relative to the actively managed competition.
Keep in mind that you can replicate GMI with ETFs for under 50 basis points, or about half as much as what many actively managed funds charge. In fact, quite a few actively managed multi-asset class funds even charge three times more than the investable version of GMI.
There's reason to wonder if GMI will deliver equally strong performance results over the next 10 years. In fact, I expect that its relative performance will fade a bit. That said, there's no reason to think that GMI won't deliver average to moderately above-average results in the years ahead. To expect otherwise requires some rather radical assumptions.
One of the reasons that GMI has earned such a handsome relative return vs. Predicting winners and losers, whether it's individual securities or asset classes, is tough—really tough. We know this to be true because mediocrity is widespread in actively managed funds. The chart above is just the tip of this empirical iceberg. Maybe this will change in the years ahead, but making a persuasive argument along these lines relies heavily on predictions, starting with the idea that more active managers will do a better job at overcoming the uncertainty that otherwise harasses the rest of the crowd.
Good luck with that. If the future will suffer higher volatility, as Lo predicts, it's not clear how this will translate into dramatically stronger performance records for active managers. Predicting is tough enough in periods of relative calm. Will forecasting get any easier if markets are headed for rougher seas? Actually, you can just as easily make the opposite case: greater volatility will enhance the relative allure of a buy-and-hold strategy that holds everything.
If prices are going to bounce around a lot more, and markets are becoming increasingly complex, as Lo says, it's not obvious that the job of active management is destined to get easier. In other words, what would we have to do to earn a substantially higher return vs. One possibility is rethinking the asset allocation. An extreme example: choose the asset class or group of asset classes with the highest expected return and shun or short those that look poised for trouble.
Another possibility: trade in and out of asset classes with a fair amount of frequency in an effort to time the markets. Yet another strategy is picking the most-promising securities within the asset classes while avoiding those that appear to have relatively dark futures. The problem, of course, is that few investors can take advantage of these opportunities in relative terms because of a simple fact: alpha sums to zero.
For every investor who earns above-average performance, there is someone who lags the benchmark. In other words, the winners are financed by the losers.
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The main idea behind buy-and-hold is that you stay invested throughout market cycles, as even missing just a few of the best days can have a major impact on your long-term returns. But despite the evidence in support of buy-and-hold investing, many investors find it difficult to sit tight and leave their investments alone.
This is often because the anxiety and discomfort associated with a higher level of investment risk can make it tempting to over-trade. During periods of market volatility, a sensible buy-and-hold investment can quickly turn into an active trading strategy. This can mean that not only do you end up buying and selling at just the wrong time but you also increase your investment costs via trading commissions. The idea behind buy-and-hold is that you are eventually rewarded for taking extra risk but only if you stay the course and sit tight.
Investors may also fail to achieve good returns because their portfolios are too concentrated in the shares of just one or two companies. Whilst this higher level of risk could potentially earn a higher return, there is a very real danger that a specific company doesn't perform as expected, or even goes out of business.
A well-diversified portfolio helps investors reduce the risks associated with company or industry-specific events. There are some other advantages to a buy-and-hold strategy. First, it makes for an easier investment journey because you only need to choose investments at the outset. Once you've built your portfolio, you won't need to make changes or check prices.
It also makes it less likely that you'll make badly-timed decisions. The whole point is that you settle down and hold the investments for a long time. Second, since there'll be fewer transactions you'll pay less in commission and fees, which can make a huge difference to your long-term investment returns. However, like any investment strategy there are downsides as well.
In a true buy-and-hold strategy, you'd be holding onto your investments no matter what happens. This means losses could be potentially severe, as you wouldn't sell your investments even if they continue to drop for some time. You could carry on holding them until the bitter end, when they're worth very little or nothing at all. This essentially means that if you are investing on a regular basis your contributions will buy more shares when prices are low and less when they are expensive.
Over the long run this should help smooth out your returns, although this is not always the case, particularly if you invest in a rising then falling market. Find out more about how pound cost averaging works. Any investment comes with risk and there's always the chance you'll get back less than you expect, or even less than you invest. If you're comfortable putting your money away for a long time, you can accept the risks involved and are not keen on actively trading, then a buy-and-hold strategy could be for you.
But there's no guarantee your investments will grow in value and, by not actively managing your portfolio, it may mean you miss out on opportunities in the market. If you're not sure which investment strategy is right for you, you may want to seek independent financial advice. You'll need to pay for this, but it may help you work out how best to achieve your investment goals. The value of investments can fall as well as rise. You may get back less than you invest. In the wake of the market meltdown of and the financial sector's dubious shenanigans before, during and after, it's hard for some investors to consider putting money into this sector.
WFC has a year history, and was the wise purchaser of Wachovia Bank, the Charlotte based super-regional, for a steal at the height of the banking crisis. It has more than , employees and over 70 million customers. WFC is the epitome of a core holding with a Although there is certainly a perceived risk due to the outstanding litigation, a subject I addressed in Litigation Risk is Not So Risky , BP has core written all over it.
Arguably, such a low multiple is evidence that the market has already priced in considerable exposure. Who would have thought one of them would become a staid core holding? Still the king of chips in a world of competition, INTC makes a product that virtually every person on-line has used or currently uses.
It's here to stay. Yes 11 -- I had to check that twice. Once you've established your portfolio's core, you can consider more speculative, risky approaches like options, short-selling, etc. Believe you me, when you're lying in bed at night sweating the short squeeze on Facebook FB, you'll be glad that you've got a core to fall back on. A final point -- this sample core portfolio is just a starting point, and many of the names have reasonable substitutes.
If you don't like BP, substitute Exxon or Chevron. But whatever your choices, be sure to reinvest the dividends. If the stocks are good enough to hold, then they're good enough to buy more of. Mike Fleenor 16 Followers. Building a Core The core is the center of an investor's portfolio. Five Solid Core Holdings Utilities Perhaps no industry is more safe, reliable and boring than utilities.
Consumer Goods Consumer good stocks will always have a presence in our markets because these companies supply us with necessary products to live. Banks In the wake of the market meltdown of and the financial sector's dubious shenanigans before, during and after, it's hard for some investors to consider putting money into this sector.
Conclusion Once you've established your portfolio's core, you can consider more speculative, risky approaches like options, short-selling, etc. This article was written by. Mike Fleenor. I am a practicing attorney whose primary interest and hobby outside the court room is investing for myself and my family. I hold a B. I have studied markets and investing for in excess of 25 years. The photo of the bear does not represent my investment outlook, it is simply a photo of a large black bear from my neighborhood here in the Blue Ridge mountains.
Buy and hold is dead investing in oil documentaries about forexIs Buy \u0026 Hold Investing Dead? - Ask A Fool
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This article may make some people angry about the past decisions they have made. Now, in any transaction in any market, who is it that makes money, the consumer or the store owner? You guessed it… the store owner! We have to switch our thinking. We need to think like a store owner or retailer rather than a customer. What do retailers like Amazon and WalMart sell? So how can we make money in the financial markets?
Just like Ben and Jerry do in the Ice Cream market. Just like Ford does in the automotive market. And just like Apple does in the personal computing market. We need to do as the Amazon do. Buy-and-hold is a strategy that may be better suited for investors with a lower appetite for risk and plenty of time in front of them.
It also doesn't take much time or skill, unlike other types of investing. You just need to choose the right securities, buy them, and not sell them. Consider whether a passive, long-term technique such as buy-and-hold could make sense for your goals. Buy and Hold. Table of Contents Expand. Table of Contents. Definition and Example of the Buy and Hold Strategy. What It Means for Individual Investors. Pros and Cons of the Buy-and-Hold Strategy. The Balance Investing.
By Kent Thune. Kent Thune has spent more than two decades in the financial services industry and owns Atlantic Capital Investments, an investment advisory firm, in Hilton Head Island, South Carolina. Learn about our editorial policies. Reviewed by Marguerita Cheng. Learn about our Financial Review Board. Definition and Examples of the Buy-and-Hold Strategy The buy-and hold-strategy is used when securities are held for long periods of time.
Note Buy-and-hold is in opposition to absolute market timing. Note Buy-and-hold is most often a long-term strategy, but the exact length that you hold depends on why you're investing. Pros Cost savings Reduces risk Simplicity. Cons Price risk Principal risk Lack of flexibility. Key Takeaways The buy-and-hold strategy is a form of passive investing in which someone buys securities and intends to hold them for years—even decades.
The central idea of this strategy is that it's better to ride out any turbulence than to attempt to time the market. The buy-and-hold strategy may be used in conjunction with other strategies, such as dollar-cost averaging. Article Sources.