Buy and Hold is Dead in the New Age of Investing
The End of Buy and Hold Investing?
With the Dow dipping to the mid 6K range (down from 14K) and the S&P 500 facing a similar decline recently, market levels like this have not been seen since 1997. This means that if you put all of your money, let’s say $100K, in one of these market indexes back in 1997, you’d have, well…just about $100K and no return on your investment in 12 years!
If you put in all of your money in these indexes after 1997, you most likely have had a negative return on your investment. For those who are just starting to invest, what does this all mean for the common investor? We’ve all heard some variation of the time-tested (until now) philosophies:
“Buy and hold – be patient.”
“The stock market has returned 12% historically since the Great Depression.”
“Investing in index funds, mutual funds, and stocks is the path to retirement.”
Will the Old Buy and Hold Philosophies Still Work?
Sure, stocks, ETF’s, and index funds will still be the primary way to grow your wealth and get you the highest returns over time. Also, some variation of buy and hold will be successful (but not holding forever unless it’s a high paying dividend stock or fund).
What’s dead is buying and holding the general U.S. stock market indexes – the S&P 500, the Dow, and the NASDAQ. I just don’t think that this is a wealth building strategy any longer. These indexes have performed well over the long, long haul historically due to the following factors:
- huge agricultural and technological breakthroughs (fertilizer, cars, planes, the computer, the Internet)
- a dramatic rise in the amount of investors and money flowing into the markets
- rapid inflation due to massive amounts of credit passing hands
Going forward, you most likely will see diminishing returns in all three areas.
Additionally, beyond any other factor, is that the market is now being influenced and controlled by the media, hedge funds, and the use of illegal and anti-growth techniques. The common ‘buy and hold the general market’ investors are getting slaughtered.
Investing Strategies that Still Hold True
One philosophy that I see continued value in for a long time to come is Warren Buffet’s:
“Be fearful when others are greedy, and greedy when others are fearful.”
What does this inherently mean? Well, look at the tech market back in the late 90′s and the real estate market of the mid 2000′s – hoards of greedy investors were pouring money into these markets with the hope of getting rich quickly. They were greedy. What happened? Those who got in late in the game and didn’t sell in time lost just about everything. However, if you had followed Buffett’s strategy, you probably would have sold.
On the flip side, look at the market up until about a week ago. You couldn’t find any positive market news ANYWHERE. This is the close to the ultimate high point of market fear. Could fear get higher from here? Sure. But we’re talking about relative fear and greed points here. You’re never going to be able to time the market perfectly.
How I Plan to Invest Going Forward
The following is not investing advice (I am a horrible investor, so do not listen to me), but going forward I personally plan to:
- Buy beaten down (well beyond fair and rational valuation) market sectors at the high point of fear and selloff. I will do this mostly through index funds and ETF’s, and occasionally a stock or two. I also plan on putting money into stocks that offer a high dividend yield at a low risk and have continually increased their dividends over time.
- Sell these sectors when they are up (well beyond fair valuation) and a healthy amount of greedy, return-chasing investors jump in.
- Once sold, I will place my money in FDIC insured CD’s (laddering the time span), high yield savings, or money market accounts so that I can quickly access this money when needed.
- Use low cost online discount brokers like TradeKing and Vanguard.
I’m not talking about day trading or even yearly trading here. What I’m going to do is invest in sectors based on where in the growth and decline cycle that sector is in. What’s this going to require?
- A ton of patience.
- Education on how to fairly evaluate a market sector and where it’s at in it’s cycle.
- The ability to be a contrarian and go against the grain, or to tune out the noise.
- A lot of work.
Work is key. Most people aren’t willing to put in the effort that it will take to be a successful investor in this new investing climate. There won’t be any lucky common investors who can pull in 10% annualized any more. Be an uncommon investor who is willing to educate yourself and put in the time to research and you may fair well.
I will also say this – I’ve been wrong many times before, and there are lots of valid reasons to invest in index funds and buy and hold – even Buffett likes this strategy (in addition to his strategy of buying more when everyone else is selling). Invest at your own risk, I’m not an expert by any means.
Buy and Hold Investing Strategy Discussion:
- What will your investment strategy be going forward?
- With the recent market collapse, has your investing strategy changed?
- Is buy and hold dead? Take the Poll!