The buy and hold investing strategy for stocks may be dead. I’m not sure it makes sense anymore. We hear financial advisors strongly recommend, “a diversified portfolio of stocks, bonds and mutual funds” whenever the word, retirement is mentioned. But, did a diversified portfolio help in 2008 and 2009, when the market lost half its value? Maybe it helped a little, but most people saw their 401k and retirement assets cut in half.
I have heard the recent statement, “Buy and hold isn’t dead, it’s just impossible.” Is that a truer statement? In this article, we dive into a quick description of what the buy and hold strategy is, why would we use it, why it may not be the best strategy and finally some alternatives to the strategy. I hope you read until the end, because as always, I will give my personal thoughts.
What Is Buy And Hold Investing?
Now, we are talking solely about the stock market. For the sake of time, I will not go into thoughts on the bond or real estate market much. A buy and hold investing strategy is where someone purchases an investment for the purpose of holding it regardless the general market fluctuations. This can be a stock, ETF, bond, mutual fund or real estate strategy. An example of this is buying a mutual fund, consistently adding money to the investment over time, with the hopes that it will increase in value.
This particular strategy was created based upon the average annual return of the S&P 500 index being around 10 percent since its inception in 1927. Furthermore, mutual funds were created under this same concept. If the S&P 500 can average annual returns of 10 percent with so many companies represented, then another basket of stocks (mutual funds) could potentially do the same. Therefore, the thought was a buy and hold strategy of multiple mutual funds could potentially diversify your investments and allow an even greater return. Please check out my article on ‘Mutual Funds’ for more on that.
Why Would We Use This Strategy?
Buy and hold investing in the stock market is typically driven by investing in mutual funds. Although, it can be accomplished with single stocks. Furthermore, it is a very passive investing strategy. There is not a lot of research or work involved in this strategy. Many financial advisors would recommend this strategy for individuals that are not interested in researching investments. This offers the option to automatically add money to your investments without having to “monitor” the market.
Why Would We Consider It Dead?
The general consensus as to why the buy and hold investing strategy is dead could be because the strategy is unrealistic during a market down-turn. Take for example the 2008 – 2009 stock market crash where most portfolios lost around 40 to 50 percent of their value. A buy and hold investor more than likely sold at the bottom and waited until the market went back up to buy back in. Thereby, missing out on all the gains while the market went up. This would depend on what mutual fund or stock you held during this time. There were some stocks, mutual funds and ETFs that went up in value during this time.
Another issue here with the buy and hold investing strategy is that it focuses only on individual investors with long term time horizons. Furthermore, the strategy assumes that over time, most investments will go up. If you have a shorter time horizon for growth, this strategy could be very costly if the market turns down. Given that the S&P 500 has an average annual return of around 10 percent for the past 90 years, this perspective may be true.
However, there are several caveats in this equation. If you invest 1,000 dollars in the market and lose 50 percent, you now must get an annual return of 100 percent the next year in order to simply get back to where you first started. Think about it, $1000 minus 50 percent ($500). We now have $500 starting in year 2. In order to get back to $1000, it would have to double that year. Specifically, this poses a problem for mutual funds. Since there is no way to truly manage risk in a mutual fund, other than diversification, you are stuck taking the loss. Would you buy at the bottom, sell or leave it alone?
Risk Management On Buy And Hold Investing
Whether you invest in Stocks, ETFs, bonds, mutual funds or real estate, every investor must understand their risk. Not only understand it, but manage it. Risk management is the key to building a successful portfolio.
In the buy and hold investing strategy for mutual funds, there is no way to diversify your risk. Unless, you bet against yourself and buy the inverse of the fund you currently own. With Stocks and ETFs, you can buy insurance on the downside price fluctuation. As with real estate, you can purchase insurance against total loss. Insurance for stock fluctuations are called options. Oftentimes, commodities can be a risk management strategy. Gold, silver, oil and precious metals offer a way to manage some risk of a stock market collapse. Some also invest in foreign currencies or cryptocurrencies to spread exposure.
Alternatives To Traditional Buy And Hold
The most obvious alternative is active trading. This could mean day trading or swing trading. This does require research and time to be effective. Another alternative could be to avoid the stock market all together. Investing in real estate offers multiple options. Flipping real estate or wholesaling could be a viable way to build income. A buy and hold investing strategy in real estate could actually make sense given that there are many tax advantages to owning real estate, providing housing and collecting rent. Foreign exchange trading and cryptocurrency trading are also alternatives. Lastly, creating your own business is another option.
My Final Take
The point I am trying to make here is that, with so many alternatives, is the buy and hold strategy for stock investing really a good strategy? I would offer that it depends on your viewpoint. It is your money, therefore, your investment. How hard do you want to work for your future? Remember, I am not a licensed advisor and cannot give you advice one way or the other on financial planning. However, investment in yourself and your education is the best investment of all. Learning new things and new ideas is what separates the wealthy from the non-wealthy. If you are interested in buying and holding, I really enjoyed the book, ‘The 3% Signal’ by Jason Kelly. This book offers a different view on buy and hold that may be an excellent strategy. Plus, it takes the guess work out of investing.
In this article we learned that managing risk is key to building a successful portfolio. It is difficult to manage risk with mutual funds. You can buy insurance on ETFs and Stocks. Real estate investment offers many tax advantages. Currency trading can offer another level of protection against inflation. However, it’s still incredibly important to learn how to manage your risk with trading. Notwithstanding, if you are really looking to build something that can offer a far better return than a buy and hold strategy, build your own business! This will require time and investment in yourself, but the returns are far greater than any other strategy.
Before you go…
Do you want to learn how to start a business and scale it to achieve your dreams and goals? You can start a business easier than you think, but it requires help and education to make good money. The program below offers a coach mentor on day one and walks you through the process how to get started.
We will show you EXACTLY how to build a business online and customize a plan just for you. We will help you choose a niche, setup your online business and help with selecting offers that you can promote.
On top of that you will get ONE on ONE mentoring to make sure you are doing things right.
A great way to be able to save more money is when we make more money.
Cheers to your success and See you at the Top!