BUY AND HOLD IS NOT THE ANSWER

The Solutions are Worse than the Problem

SUMMARY:

Did you ever question the solutions that the financial professionals provide? Are the solutions to the risk of bear markets truly improving your investment results? What if the solutions are lowering your long-term investment returns and not really helping you avoid the pain of bear markets? Is asset allocation a good thing? Are bonds helping or hurting your portfolio?

EVERYONE HATES TO LOSE MONEY

No one likes to see their investments drop by 30% or 40% or 50% in bear market crashes like the one we lived through in 2022. In fact, the pain associated with losing money is greater than the pleasure of seeing your investment portfolio increase in value. So, the investment professionals have designed lots of different strategies to minimize the pain and damage of bear markets in stocks. Diversification and asset allocation are said to be good methods to avoid risk in your portfolio. Fixed income securities or bonds are less risky according to the investment professionals and are recommended for most portfolios. They also tell us to put some of our portfolio in international equity markets or commodities because they don’t necessarily “correlate” with the US equity markets. And because we are so afraid of losing money, we are eager to follow their advice.

BETTER THAN THE WORST

Buy & Hold is a form of disciplined investing, as opposed to emotional investing, and that is a good thing. Fear, if not held in check by discipline, causes people to buy into the equity markets at the top (fear of missing out) and sell at the bottom (fear of getting wiped out). This is the worst mistake that many stock market investors make. So, Buy & Hold is an improvement over the worst possible investing strategy, but should we settle for “better than the worst”? And based on the popularity of Buy & Hold investing and the other strategies that we “must” follow if we pursue Buy & Hold, what are the real costs of Buy & Hold investing? We encourage you to ask those questions.

The other benefit of Buy & Hold investing is that it teaches people to think long-term for their stock market investments. Many people mistakenly focus too much on short term results from their stock market investments. Get rich quick schemes have been around for a long time and will probably never go away. It is important for everyone to understand that money invested in the stock market should stay invested for a minimum of five years. Money that you will need access to in the shorter term should not be invested in the stock market. The stock market is the best place to invest for the long term, but the market can be very volatile in the short term.

THE TRUE COSTS OF BUY & HOLD

There many costs associated with Buy & Hold investing.

• Financial and Emotional suffering during bear market crashes

• No growth in the value of your stocks for anywhere from 4 to 8 years

• Lower returns from your portfolio from bonds

• Lower returns and higher volatility in your portfolio from international investments and other asset classes.

FINANCIAL AND EMOTIONAL SUFFERING

This cost is the easiest to comprehend. Anyone who was heavily invested in the stock market in 2000 and 2008 can distinctly remember watching their investment portfolios drop by 50% or 60% or 70%. 2022 was painful but not as bad as the early 2000s. It can be excruciating watching a $500,000 retirement nest egg drop to $250,000 in a short period of time. The emotional suffering that goes along with these scenarios can be devastating. I know I felt awful in both of those crashes.

YOUR INVESTMENTS DON'T GROW

It feels good to see your portfolio rebound from big market collapses. But it can and does take a long time – from four to eight years in some cases. And then you realize that we are all just rooting for our portfolios to get back to break-even. To achieve our long-term financial goals, we need our investments to grow and to not just stand still. The S&P 500 basically went nowhere from 2000 to 2013. Time periods like this can be devastating to your financial plans depending upon your age. If you were early in your retirement or just entering retirement during the early 2000’s, your financials plans were probably thrown into disarray. It can be very difficult to make up for this much lost time.

THE PROBLEM WITH ASSET ALLOCATION

Because the investment industry needs you to buy & hold to keep their fees rolling in, they created the asset allocation strategy. The Asset Allocation strategy pushes people to own bonds and international stocks and small cap stocks to supposedly reduce losses in bear markets. If you are buying and holding, the industry says you need to spread your investment across different asset classes to reduce volatility. But it doesn't work.

The other asset classes also only drag down your returns. Stocks outperform bonds by more than 2 to 1. The S&P 500 has consistently beaten international stocks over the long term. And international equities typically fall by as much or more than the S&P 500 during Bear market crashes. For short periods of time, it is possible that international stocks or other asset classes outperform the stock market, but we should be investing for the long term and not for isolated, short periods of time. So, the investment community has sold you on the benefits of asset allocation and it doesn’t really work in the long term. It was a nice try to deal with the risk of Bear market crashes, but it has cost people lots of money.

Buy & Hold is better than the worst investing approaches out there. But we believe that you should not settle for “better than the worst.”

When you have a strategy like our Market Signals investment system, most of your investment problems are solved. You can invest aggressively in the best performing funds that generate annual returns of greater than 10% because you have protection against the big losses that happen in ugly bear markets.

Grab a copy of our free white paper on Market Signals by clicking here.

Be well,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.