Based on consistent results I think Buy & Hold should be renamed
Buy, Hold & Bye Bye. It sounded great for a while, especially for
the huge majority of investors who don't have the time or
interest in really doing due diligence on investments.
Investing, for some, might be just a hobby, but it can sure be an
expensive one. Yet, if you're like many of us, you know there are
opportunities for putting your money to work and having it grow.
Nonetheless, investing, like any business (and it is a business)
has its own unique challenges. Here are what I consider to be the
top three.
1. Intelligently Deciding What to Buy
When it comes to Mutual Funds, there are today over 13,000
choices. You're going to check out each one, right? Yeah, right.
And even for those you do check out, what are you going to look
at? Past performance. What else can you look at? But as it says
on the bottom of every prospectus, past performance is no
guarantee of future results. And in these days of cockeyed cooked
books, past performance is barely a guarantee of past results! So
you need to decide not only what to buy, but you have to be darn
sure you know when to sell it when future results of an
investment don't match your expectations.
Sure, there are investment rating services that provide a false
sense of security to Buy & Holders. But the fact is that pretty
much every investment that rating services have touted over the
last few years has lost money. So much for depending on that sort
of expert advice.
2. Determining When to Buy?
It shouldn't matter when you buy if you're never going to
sell—but it does. If you buy just before the market falls, guess
what: You will start with a loss that you have to recover before
your investment begins making money. So what? According to
statistics on mutual fund sales, most investors buy just in time
to grab a loss.
Buy & Hold may turn out to be a profitable approach if you intend
to hold forever. But we don't live forever, and most people are
going to want to sell their investments at some point before
forever hits. It's small comfort to know that if you hold your
investments for another 20 years, they will make money—especially
if you're retired and want to take a cruise next month.
3. Staying the Course.
It takes a strong stomach to hang on to an investment when you
see it disappearing before your very eyes. Or even when it's up
one day and down the next. (Like these days, for example.) And
once you decide that having to wait for three decades before your
investment gets back to square one is not such a great deal, what
happens to your Buy & Hold strategy then? It's out the window and
all you're holding is the bag. The much emptier bag.
So what's an investor to do, especially an investor who's really
not a professional? For one thing, find a reliable method of
gaining information. One that I like is a trend analysis approach
that objectifies market behavior. This type of approach is more
kinetic in that it doesn't rely on past performance—it relies on
past and present performance to indicate a "trend" toward future
performance. While that's not infallible in any sense of the
word, it is a broader range of information than most guides.
Using one of those as a foundation for your strategy, determine a
buy point and, most importantly, a sell point for any investment
you make. Get comfortable with taking small losses before they
turn into big disasters.
There is always risk in investing. However there are ways to
minimize risk so you become an investor, not merely a gambler
with high hopes for a Buy & Hold approach that many people have
now found to have failed them.
© Ulli G. Niemann
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