Buy and hold is the mutual fund companies Holy Grail of making money in the stock market not the investor’s.
Buy and hold investing is a strategy where every day is a buy signal no matter what; there is not a real exit strategy after you buy, and you take all the risk while your money manager gets paid for adding little or no value to the process. Buy and hold is a strategy that benefits mutual fund managers not the investor. What does the strategy say to do at the beginning of bear markets? Stay the course. What does the strategy say to do during panics and crashes? The market will come back. The investor is exposed for years and decades to downside risks with not exit strategy except for maybe rebalancing a portfolio if they are lucky. Bull market profits come and go with no strategy to lock them in, they just melt away. You buy during bull markets; bear markets, corrections, dips, and crashes with no discretion. You also hold through all these market environments with no plan except: buy and then hold.
· Buy and hold for the long term! The market always comes back eventually.
· Stay the course! If you get out how will you know when to get back in?
· Keep buying during the dips in price. The lower the price you get the better for you long term.
What are the problems with this philosophy? Buy and hold doesn’t work. Buy and hold is useless as a stock market strategy. Why? It never addresses the REAL issues for winning in the markets:
· Buy how much of what? Stocks? Which stocks? Exchange traded funds or mutual funds? Managed funds or index funds?
· If I use mutual funds do I take all the risk while the fund managers make guaranteed management fees?
· Do the people that push buy and hold investing have a conflict of interest?
· At what price do you enter your holdings?
· Hold for how long?
· Do you ever sell?
· Do you put all your money into buy and hold at one time or stagger it in slowly?
· How do you make money in a bear market?
· Can you emotionally handle losing 20%-50% of your account in reality?
· What if you need to take out the money during a long bear market?
· What value does this philosophy even add?
· Is the real key to buy and hold investing success simply what the stock market as a whole does inside your time horizon?
Buy and hold is not the Holy Grail of investing that Wall Street and the mutual fund industry has made it out to be. While buy and hold looks like a great investment system during bull markets it looks foolish at the bottom of bear markets when your account is down 20%, 30%, or 50%. There are also many times that a buy and hold investor can make zero profits for a decade based on popular indexes. One quick example is the first decade of the 21st century from 2000-2009, a lost decade for any returns. The Dow Jones Industrial Average closed at 11,497 points on December 31st, 1999 and it closed at 10,428 points on December 31st, 2009. An entire decade where buy and hold investors road quite a roller coaster of ups and downs for no returns from capital gains if you were holding this index as an example. You don’t have to pay a mutual fund manager or financial advisor a management fee to get no return for a decade you can do that in a savings account with virtually no risk.
Buy and hold investing is not the Holy Grail of profitable investing, it does not always work in a timely manner. The 1905 Dow Jones Industrial Average close of 96 points was not permanently eclipsed until 28 years later in 1933. The DJIA spent 15 years trying to break over 100 points permanently before the roaring twenties finally saw an amazing run up of 500% to 381 points from 1921 – 1929 before a crash back to 41 points in 1932. Yes, that is a crash from 381 to 41 points in the DJIA. Buy and hold advice would have been just to hold on, it will work out in the long run, and stocks always go back up. That would have been a ride that not many of the toughest professional money managers could have made much less the average investor. The problem with buy and hold is that we have a limited amount of time to make our returns, when we are fortunate to participate in a great bull market we have to have a process for locking in those gains in the short term and wait for the next bull train. Another example is that the 1965 Dow Jones Industrial Average close of 969 was not permanently broken until 17 years later in 1982. The DJIA would spend 17 years fighting to break over the 1,000 point resistance level. In more recent times it took until February of 2013 to get back to the DJIA 14,000 high set in October 2007. That is another 7 years of no returns but lots of risk. Another element for consideration is the destruction of buying power of your money while you are waiting a decade or two to get back to even in your investments. As the government continues to print dollars it creates inflation as more dollars keep chasing the same amount of goods. Currencies lose their buying power over the long term when the amount circulating increases continuously.
Ben Stein famously said, “If you didn’t lose a lot of money during the Panic of 2008, you were probably doing something wrong.” Those words really showed the naiveté of the philosophy of buy and hold investing. His view could not be any farther from the truth. Many people made fortunes in 2008 with solid moneymaking strategies. The winners were not doing anything wrong, they just happened to have had the vision to prepare for the unexpected, and when the big surprises unfolded they cleaned up. Many of the people that had profitable years in 2008 were the ones trading the trend of the price action in the financial markets. Investors and traders that had an exit strategy to lock in profits in 2008 also avoided much of the downtrend that ensued. The buy and hold philosophy does not have an exit strategy based on the trend of price action, trend traders do.
Buy and hold investing began to be accepted after the 1982-2000 bull market run based on hindsight and recency bias. Then the recent recovery from the 2008 lows back to the 2007 highs in the stock market reinforced the just wait it will come back mentality. Investors fail to understand that there is a better way. Riding a roller coaster up and down to break even is not the only way to invest and trade in the stock market. Trend traders trade the current trend in the stock market. They find ways to quantify buying positions in markets that are going up and even selling short in markets that are going down. Their profits come from trends and they search for entry signals into trends across many markets. They can make money when the market goes up or down, they are not at the mercy of the market.
Investors have been conditioned for decades to believe that they cannot beat the market. They’ve been told to buy index funds and mutual funds, listen to CNBC, and trust the government. I have news for you: That does not work. We have all seen one market crash after another for the last decade. But the powers that be keep telling us that the old investing ways are the only way. Deep in our gut we know it’s not true. Even if we don’t know who the winners are, there are winners in the market, especially in the middle of a crash.
Trend following is a new way of thinking, a new way of making money that is entirely different from what you have been taught. It varies vastly from what you have heard from the brokerage firms, the media, and the government. Bottom line: I go looking for answers where most people can’t or don’t know how to go. Digging for trend following trading lessons is my lifeblood.
Plenty of people write books telling you that they know what will happen tomorrow. Do you really want to bet on the words of people who say they know what will happen tomorrow? Doesn’t that just feel like a roll of the dice at the craps tables? Exactly. It is nonsense. However, I do not want you to take my word.
There are people out there that have literally pulled in billions of profit from the market for decades. They are true trading winners who have shared with me their lessons to money- making success. In turn, I am sharing their wisdom with you.
What are the most common threads among these men and their successes? They were all self-starters not born with silver spoons. They did not start with inheritances (but you could have). They figured out how to win, when everyone said they’d lose. They never quit. As diverse as their stories are, they all make up an inspirational foundation you can use to start making a fortune over the course of your lifetime.
Reality of Mutual Funds
Are you willing to admit that buy and hold only works for people who live forever? However, mutual funds still make a fortune for selling the dream. Mutual funds make billions in fees. These fees are paid to mutual funds for no performance even during 10 year periods when returns are flat. Why pay billions to mutual funds for no performance? When the stock market is flat or down you do not need to be paying management fees to mutual fund managers for no performance or to be down, you can do that for free. You will see over long periods of time that the large majority of managed mutual funds have no skill in generating long term out performance of stock market indexes. They are at the mercy of bear markets and get paid well to get beaten by their benchmark the majority of the time.
Billions is a lot of money for delivering no return. Bottom line, mutual funds are big ‘skimming’ operations. They skim a little off everyone and before you know it they are raking in billions of dollars in profits.
Is there a way out? Yes. The great traders are not buy and hopers or fundamental traders. The great traders have a plan to deal with the unknown. They know how to handle their emotions. They make money when all hell breaks loose (i.e. 2008). The market winners are trend followers who have learned how to ride the bucking bronco up and down for profit.
Alternatives to Buy and Hold Futility:
Trend following never requires you to act as a drone and mindlessly follow tips from news personalities. Trend followers accept all blame for their trading, never attempting to shift the blame to others. Trend following does not require financial statements analysis. Balance sheets, cash flow statements, income statements, price/sales, price/book ratios, debt leverage, management changes are not used by trend followers. These factors are not relevant.
A few of the more simple edges that trend followers possess is that they have an exit strategy on their holdings. This is a huge advantage over buy and hold investors that hold a stock or index as it falls 5%, 15%, 25% or even 50%. Single stocks can even go into bankruptcy and end up at $0. A trend follower is not going to take a huge loss on a single position; they are going to get out at levels that invalidate the trend. Trend traders have an exit strategy to limit losses and lock in gains. Trend traders will take long positions in up trends and will sell short in downtrends, they are agnostic about future price action and trade based on the current reality of price action using a systematic approach.
Investors can use the buy and hold philosophy to ride the stock market roller coaster with no seatbelt and hope in the end it all works out or they ride can be a trend trader riding the bucking bronco of price action in the financial markets with a saddle and a plan.
Step one: Trend Trading 101 -> 5 Moving Average Signals That Beat Buy and Hold: Back tested Stock Market Signals