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Why NOT "Buy & Hold"?

What is "Buy & Hold?"
Until now there has only been one widely accepted strategy to invest in stocks – “buy & hold”. This means you invest your money into a 401(k), or any stock investment vehicles, and hold those same investments through all the ups and downs of the stock market with the promise that your money should grow based on historical rates of return.

The idea of "buy & hold" as an investment strategy has been pushed by the financial community for years as a promise of financial freedom in the retirement years. This is not necessarily because it's the best solution — in fact, many of the richest and most successful investors and mutual fund managers often rotate their money in and out of investments to take advantage of changing economics and to protect their gains. Yet this kind of strategy requires a knowledge of the financial markets that few people posses. This is why an investment model such as "buy & hold", which requires no understanding of the stock and bond market and that requires very little time to manage, has become the preferred investment plan sold to the general public.

No one can predict whether future events will hurt or help stock performance but one thing for sure - the "buy & hold" investor won’t know if their goals and dreams have been significantly diminished until its too late to do anything about it.

"Buy & hold" has been sold to people, in part, because there were no good alternatives. After all, it was not until recently that information was made available and technology was sophisticated enough to measure and back test many aspects of the stock market. The processes that PerformanceSignal uses to generate signals are new developments and a by-product of our nation's ability to innovate. The good news for investors is that now there is an alternative to "buy & hold": PerformanceSignal.

Here are some more reasons you might question whether the “Buy & Hold” strategy is right for you.
You may need your money for emergencies.
You may incur an unexpected need for funds because of health reasons, disasters, litigation etc… now if you redeem some or all of your funds from your 401k provider, you may be redeeming your money at the very worst times. Those times when stocks are beaten down to their lowest levels the same times you’re are told to endure in a buy & hold approach. Unfortunately, this kind of redemption may devastate your retirement plan forever.

“Buy & Hold” only works when the stock market goes up.

  1. Stock markets can decline or go sideways for as much as 20 years at a time.

market cycle chart

  • When stock markets decline or go nowhere for long periods it is referred to as a Secular Bear Market. History shows that Secular Bear markets are normal and many experts believe that we have entered a Secular Bear Market. If so, market returns can be expected to be much lower than normal. Secular Bear Markets require that you apply proven strategies in order to enhance returns. Bill Wolman, chief Economist for Business Week magazine said ”a return of fewer than 2 percent is a far more realistic outlook for a period that extends well past the end of the first decade of the twentieth century”.
  • Other factors affecting potential stock market gains and support the Secular Bear Market theory:
    • Changing Demographics- by 2016 more people will be turning 70 than any other time in history and will be required by law to begin taking withdrawals from their retirement accounts. This potential high redemption scenario may affect the stock market in a very negative way and will assuredly affect an already strained social security and medicare system.
    • Today’s expanding economy is being funded by the highest Debt ever per household and the federal government
    • Shifting economics-we are exporting jobs at a phenomenal rate as educated foreign workers are willing to work for much less than our American counter part.
    • Globalization and shifting world growth
    • Terrorism

“Buy & Hold” requires an individual to endure enormous pressure and mental anguish when stocks are declining rapidly.
For many, October 2002 was the worst part of the 21/2 year decline that started in March 2000. It was at this juncture that the psychological and mental anguish from watching their 401(k) statement balances go down and down took its toll, and many sold their stock allocations in favor of safe money market and bond funds. But this happened to be the lowest point for stocks, as is many times the case, and a turnaround ensued that lasted through all of 2003. PerformanceSignal had a buy signal at those lowest times giving members confidence to buy stock funds or hold-on if, for some reason, they were invested already. Most people are not wired to withstand the kind of losses that are inherent in stock mutual funds — this kind of stress usually results in bad decisions and bad moods. PerformanceSignal alleviates these problems by protecting your capital and having you invest only when conditions are ideal — something that is counterintuitive at times. I should point out that some people did have their portfolio properly allocated into different asset classes, such as bonds, during this time and were spared some of the losses.

Note: There were some that did not feel the full brunt of the pain from the declines only because their monthly contributions into their 401(k) masked the monthly losses of the markets. This, obviously, served only to give people a sense of false security.

"Buy & Hold" does not provide a way to monitor your success.
When do you know that you are not on track and what can you do about it?
In a true "buy & hold" strategy, you are expected to endure all stock market ups and downs until you retire and at that point, the truth will be known whether you have enough saved or not. The stock market owes you nothing, however, and may go down or sideways the last twenty years that you save. So how do you know if you are on track? You can’t say that you will have a certain amount by a certain age because the stock market may have a number of previous bad years. Many say that this scenario cannot happen and to those I say- what about Japan?

Throughout the 1980’s, Japan became viewed as a utopia, due to its people having the highest quality of life and longest life expectancy. In addition, Japan was the world’s largest creditor and had the highest GDP per capita - euphoric investors believed in the fallacy of a perpetual bull market. In 1990 interest rates rose and within months, the Nikkei stock index crashed by over 30,000 points (a loss of 75%) - at its height, the Nikkei stood at 40,000.  Japanese housing prices plummeted for 14 straight years, the Nikkei sank until its low of 8,000 in 2003. The Japanese government and corporations are still suffering under unwieldy debt loads gained since the late 1980’s. This debt was used for stock speculation and buying overpriced land - sound familiar? I have heard the arguments for why the US is different but I don't fully agree as our own comptroller general of the United States has said that we are seriously in debt as a nation and are headed for bankruptcy if serious changes are not made now (see article). It's true we may not be the same in that we lose 75% of our wealth but let's not be naive and assume losses or low or no gains are not possible either.

With PerformanceSignal you can make money every year by taking advantage of advances when they occur in any market and you can monitor your success yearly (we offer free Online Workshops that teach you how to calculate your retirement needs and use our retirement calculator to create a yearly roadmap). We help you get organized, set goals and map your progress.

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