. Ever so often you’ll read a publication advocating that investors should invest 100% of their portfolios in “the Stock Market.” Savvy readers will probably take note that this idea (buy and hold) is most popular near the end of a long bull trend, so consider this article a pre-emptive strike against this appealing but potentially dangerous idea.
Why Buy and Hold is ubiquitous
In order to examine the reasons behind a buy and hold strategy, you’ll need to look at the widely used Ibbotson Associates historical data. This data “proves” stocks have generated greater returns than bonds. In turn, have generated higher returns than cash. Many have fallen for the premise and rationalization behind this data. Unfortunately, even experienced professionals accept these assertions without giving the idea any further thought.
While such statements may be true to an extent, investors should probe a little deeper into the motivation behind, and potential ramifications of a 100% investment 100% of the time investment strategy that defines “buy and hold.” As evidenced by the last six years, although stocks may outperform bonds and cash in the long run, you could go nearly broke in the short run!
One could say the 2008 financial crash was a onetime happening but that would be incorrect. If 100% of a portfolio had been put into stocks in late 1972 – over the following two years, about 40% of its value would have been lost. During that time, as well as during the all the other financial disasters, it would have been very difficult to withdraw an income to take care of relatively common expenses, such as purchasing a car, meeting unexpected costs like a new furnace or paying a portion of a grandchild’s college tuition. Not only is this financial folly, it’s psychologically unacceptable.
Keep in mind that the 1973/1974 and 2008/2009 debacles weren’t the only collapses that left investors licking their wounds. Consider the millions sucked from the market after the 1999 and 2000 bubble or the devastation investors experienced between 1929 and 1931. Stock Market crashes have left investors in ruins on a regular timetable.
The “100% invested 100% of the time” mindset is also to assume that in the midst of a maximum drawdown one will have the intestinal fortitude to not abandon a strategy and simply stay the course. An achievement the majority of investors could not possibly attain. It can be extremely difficult for most investors to maintain an out-of-favor strategy for six months. Let alone for many years.
So if 100% invested, 100% of the time is not the optimal solution for a long-term portfolio, what is? Despite any cautionary counter-arguments above, investing in equities is reasonable but not for 100% of your portfolio, 100% of the time.
Become involved in your own finances
Become actively involved in your own finances. Simply handing money to an advisor to invest as they please is disadvantageous since they will never be as vested in an account as the investor. As well, it’s prudent to understand the advisor will make investment decisions based on their own psychological filters. For example, they could be getting some kickbacks from companies to “promote” their stocks. Even if investors are 100% sure an advisor will take care of an account without an agenda, it is still imperative for investors to be actively involved in their own finances.
You make the effort to take care of your car and get its oil changed regularly. You make sure its tune-ups are done on time. You maintain your car because you know how important a car is you.
You make the effort to take care of your house and change the furnace filters and fix whatever needs fixing. You maintain your house because you know how important your house is to you.
You make the effort to maintain your health by eating properly and exercising because you know how important your health is to you.
Why would you not make an effort to maintain your wealth as well?
Take 15 minutes a night and place trades that will have you invested for no more than days at a time. Get involved in a system that puts your money at risk less than 23% of the time.
Get involved in your own finances.
ALWAYS FOLLOW THE RULES
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