We all hope that one day we will have enough money to live off our savings and retire, but not everybody is willing to take the first step.
Why? Because the advice we received every day from the media and “experts” is often confusing and contradicting. Did you ever hope that there is some way to invest which requires little time, skill or serious effort?
Then you hear what you want to hear
- The future is unpredictable (ah, that is the reason investment can’t make money)
- Nobody can outperform the market (great, I am not alone)
- A monkey throwing darts can do better than an investment professional (really?)
- Buy and hold a low-cost index fund for 20 years will help you get rich (that is what I want!)
If you take these statements at face value, they may seem very convincing. After all, the idea of buying some blue-chip stocks, sit, relax and wait for your investment to reap sounds so enticing.
More than 93% of the people I met have no proper investment strategy but almost all of them say that they want to “buy some blue chip stocks and hold for at least 10 years”.
If you examine this “buy and hold” investment strategy carefully, you will find it severely flawed and makes little sense. In fact, it is probably one of the biggest investment lies. I will explain why.
Who really benefits from “buy and hold” strategy
If you pay attention, stockbrokers always give you “trading ideas”, but the fund managers or ETF providers always urge you to “buy and hold”.
This is because they all have different vested interest in what they promote.
- If you trade often, the stockbrokers earn more commissions, so they encourage you to trade.
- If you buy and hold, the ones who benefit the most are fund or ETF managers because they earn the annual fee as long as you “hold” the fund.
How about the data supporting buy and hold strategy?
You may have seen some research with decades of data showing buy-and-hold strategy has worked wonders. Let’s do a simple quiz.
Take a look at the two charts below, without looking at the answer, tell me which one do you think is a better performing fund?
The answer is…
Chart 1 is the S&P 500 index fund for the period of 2009 to 2013, while Chart 2 is the S&P 500 index fund for period 2006 to 2010.
Yes, they are the same fund!
There are three types of lies — lies, damn lies, and statistics. – Benjamin Disraeli
It is said nowadays people believe any data you put into a powerpoint slide. These well documented academic “research” may seem convincingly true, you really should scrutinize it further.
If you can appreciate the fact that most of the simple advice you have received is only half-true, you can start thinking about this logically.
Buy and hold strategy implies the price of a stock doesn’t matter
Do you buy anything without looking at the price? I bet you not.
But this strategy suggests that you buy at all times regardless of price or valuation. It says the best time to buy a stock is NOW and the best period to hold is FOREVER. Does that make sense to you?
If this is true, every year is a good year to buy stock. By just looking at the two charts above, does it make sense to you?
Buy and hold implies no intelligence is needed to make money
If I tell you that I have a method to make you rich with little or no effort, would you believe me? Maybe not.
How about someone comes to tell you that you can just mindlessly invest in something, don’t blink when the market tanks, and eventually you will emerge rich? will you believe that?
In the movie “Percy Jackson & The Lightning Thief”, when Percy got to the Underworld, he still seemed to have a hard time understanding that humans understand things in different ways. Grover (the satyr) said,
“Who says he’s seeing this place the way we’re seeing it? Humans see what they want to see.”
I guess he was talking about us. ^_^
Buy and hold implies that risk management is not needed
This is the most ridiculous part.
Do you have a door at home? Do you have a brake system in your car? Is there fire safety measures in your office? Should the unknowable future leave us to surrender our future to fate?
There are many things that can happen in 20 years or even 10 years. Have you switched your Nokia phone to iPhone or Galaxy? Do you still have Kodak film at home? Businesses come and go, stocks go up and go bust.
If things do not turn into what you have expected, should you just blindly hope things will get better or just exit?
Buy and hold is an offensive investment strategy
Many people chose buy-and-hold strategy because they think it is safer. They wrongly assumed that if trading is dangerous, the opposite must be safe.
Buy and hold works sometimes but it is a strategy that ignores the defensive half of the investing equation. It is like you are going to a war with only a sword but no shield.
Then how should I invest?
It’s not that buy-and-hold is a useless investment strategy, but I hope by now you understand
- Buy-and-Hold is wrongly marketed as an all-weather, all-condition investment solution.
- The supporting research is assuming certain special market environments
- You can discover the flaws by rational thinking
If you are my client, you know I use a simple “Global Momentum Compass” to track the markets. On contrary to what many people are doing, instead of focusing on what to buy, I focus on what NOT to buy.
The idea is very simple, if the issue with buy-and-hold is missing the other half of the investment equation, which is risk management, you can immediately improve your current investment portfolio by adding a “risk limiter”. Like what Napoleon Hill said,
Most great people have attained their greatest success just one step beyond their greatest failure.
You can improve your buy-and-hold investment portfolio tremendously by a simple tweak. The strategy of buying and holding investment assets is suitable for insurance companies, banks and other financial institutions who match the investment with their long-term liabilities. But it is hard for a retail investor to mimic the same.
As I always said,
There are a million ways to make a million.
I hope this article gives you a new perspective on this strategy and help you figure out how you can do better with your own investment. If you like this article, share it or leave your comment below and let’s discuss further.