THE TRUE IMPACT OF BUY & HOLD INVESTING

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 are living 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.

THE BENEFITS OF BUY & HOLD

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. Buy & Hold is a strategy for the long term. 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%. Many are seeing a similar thing happening right now in 2022. 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 TRUE IMPACT OF BONDS

Bonds are a poor long-term investment when compared to the stock market and even though they generate a predictable return via interest payments, they can and do lose their principal value. Bonds only provided interest rates of roughly 2% in 2021 while stocks grew by 27% (S&P 500). Bond rates have risen in 2022 but that means that bond values have decreased. Bonds have lost money in 2022. So, if you had 40% of your money in bonds in 2021, you lowered your investment returns by 93% (2% vs. 27%). The 60/40 split returned about 17% compared to a portfolio of all stocks of 27%. Now, you might say 17% was a nice return and you would be right. But you could have earned 27% and that 40% invested in bonds in 2022 hasn’t provided the cushion that was promised as both stocks and bonds have crashed. During growth or bull markets (85% of the time), stocks are rising by 15% per year, so the 40% allocation to bonds is costing you dearly. Bonds are lowering your returns during these time periods by about 70% to 80%. And they are not helping you all that much in the 15% of the time when markets are crashing. You are only getting an illusion of safety, but one with a pretty high cost.

THE PROBLEM WITH ASSET ALLOCATION

The other asset classes also only drag down your returns. 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. Some commodities have done well as long term investments, but they are much more volatile than the stock market, so they are not providing less risk. And commodities are very unpredictable. No one really knows why commodities go up or down over particular time periods. 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.” Our whole reason for being is to show you that there is a better way to invest. If you stick with us, we will show you how. You will be happy you did, and your money will be happy you did.

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.