Is Buy and Hold Dead?

[jonbig04 10]

I'm no expert, but is the age old "buy and hold" still good policy? Certainly it has worked in the past. Below is a monthly chart of the S&P going back 40 years.

 

Click for full size - Uploaded with plasq's Skitch

 

As you can see, buy and hold certainly worked for a large chunk of the time. Especially for those who started putting away back in the 60's, 70's and 80's, otherwise known as the baby boomers. Maybe the same people who are responsible for promoting the "buy and hold" strategy.

 

Sure it worked for them. But will the same thing work for us younger folk? It looks like buy and hold stopped working around 1997. Is there a possibility that the current generations will have to be more nimble with their finances, or at least more financially savvy than the baby boomer generation?

 

Could we say that the uptrend from 1969-1997 was due in most part to America's booming economic growth? And if so, can we expect that same growth in the coming decades?

 

Something that has been on my mind.

[karim0028 10]

I'm no expert, but is the age old "buy and hold" still good policy? Certainly it has worked in the past. Below is a monthly chart of the S&P going back 40 years.

 

Click for full size - Uploaded with plasq's Skitch

 

As you can see, buy and hold certainly worked for a large chunk of the time. Especially for those who started putting away back in the 60's, 70's and 80's, otherwise known as the baby boomers. Maybe the same people who are responsible for promoting the "buy and hold" strategy.

 

Sure it worked for them. But will the same thing work for us younger folk? It looks like buy and hold stopped working around 1997. Is there a possibility that the current generations will have to be more nimble with their finances, or at least more financially savvy than the baby boomer generation?

 

Could we say that the uptrend from 1969-1997 was due in most part to America's booming economic growth? And if so, can we expect that same growth in the coming decades?

 

Something that has been on my mind.

 

Buy and hold has been dead for at minimum the last 10 years.... What we went through was 2 bubbles, one stock and the other housing......

 

I think its never a good idea to buy and hold (better aptly called, buy and pray ).. I believe that if you have positions in a portfolio (ie. not necessarily trading money) you need to have stops when/if the floor drops out, i would say 10-15% under where you bought (at the widest, as long as you bought around a support zone)... You can always buy in again, also keeping in mind that you should move to lock in profits, not just stop loss at break even...

 

This does require that you track the market on a somewhat regular basis... But, if you have money in the market, then you should be watching at minimum semi-regularly

[DugDug 10]

I dont believe buy and hold has ever really worked in most instruments.

Its generally pushed by fund managers who are not active to say that you should invest over the long term and you cant beat the market etc; etc.

These usaully reinvest everything and also rebalance as the stocks that made up an index generally completely change over a 40 yr period.

It does work for those as a savings plan that cant watch the markets or cant make sensible economic decisions.

(put it this way if it was that easy - go and borrow 100million - plough it into the market and offer to repay it and the difference to the bank in 30 years. They should be happy to lend it to you as you are just going to buy and hold and this surely would beat interest rates - risk free with a slight banking premium - wouldn't it - especially if they are the bank pushing the buy and hold idea!!)

Once you account for inflation, interest costs and you dont reinvest your dividends and profits it does not look as good. Whilst it does have a tax advantage - lets ignore that for now as we are talking about trading and everyones circumstances are different.

 

long term trend trading aims to capture these big moves and its not buy and hold either.

 

There is nothing wrong with a money management system that reallocates between different sectors - bonds, real estate, cash, equities, commodities whilst maintaining a portfolio with exposure to all of them - the key here is to have a very simple valuation system for each product an to go overweight underwight etc;

 

Remember buy and hold is good if you only want to match an index...... it probably should form a part of the portfolio separate to the trading one - I have seen good mixes of 70-80% strategically allocated buy and hold and 20-30% actively traded....

 

Utimately it will depend on which art of the cycle you are in - my portfolio will most likely be worth more in 50 years than it will today - however I will be dead and that does not do me any good does it.:helloooo:

Edited March 3, 2010 by DugDug

[jonbig04 10]

I dont believe buy and hold has ever really worked in most instruments.

Its generally pushed by fund managers who are not active to say that you should invest over the long term and you cant beat the market etc; etc.

These usaully reinvest everything and also rebalance as the stocks that made up an index generally completely change over a 40 yr period.

Once you account for inflation, interest costs and you dont reinvest your dividends and profits it does not look as good. Whilst it does have a tax advantage - lets ignore that for now as we are talking about trading and everyones circumstances are different.

 

long term trend trading aims to capture these big moves and its not buy and hold either.

 

There is nothing wrong with a money management system that reallocates between different sectors - bonds, real estate, cash, equities, commodities whilst maintaining a portfolio with exposure to all of them - the key here is to have a very simple valuation system for each product an to go overweight underwight etc;

 

Remember buy and hold is good if you only want to match an index...... it probably should form a part of the portfolio separate to the trading one - I have seen good mixes of 70-80% strategically allocated buy and hold and 20-30% actively traded....

 

Utimately it will depend on which art of the cycle you are in - my portfolio will most likely be worth more in 50 years than it will today - however I will be dead and that does not do me any good does it.:helloooo:

 

 

I'm mostly thinking about everyone else. Working class Americans who, almost by design, know nothing about the market and aren't allowed to hire performance based money managers. It's a complete ripoff.

 

Most of these people have no choice but to buy and hold because that's what their financial advisers are going to put them into.

[DugDug 10]

Jon - a wise man said to me when I was about 15 years old....

"spend 10-15 minutes every day reading the financial press, then 1 hour on the weekend and learn from it, you will never miss the time and it will cost you nothing however it will save you a fortune over your life time"

 

Most people spend more time researching the car ( a depreciating asset) they are going to buy rather than a stock they will buy.

 

If your advisor is telling you to buy and hold a market index then they are putting themselves out of a job as you go and match some indexes, regularly invest and dont pay people fees.

 

In terms of getting enough money to invest in a portfolio of active good hedge fund managers - thats a whole other problem

[karim0028 10]

I personally think investment advisors are a crock of shit, most of them, know nothing about fundamentals or technicals and are just pedaling whatever their firm tells them to push...

 

For instance i have a friend of mine who works for Fidelity or one of these other investment services... He was telling me that now is a good time to get into 30 year municipal bonds.... Now, in my head, in the next 5-10 years shorting bonds at their present highs, is a no brainer, as they are a market like any other.... But, his take was where else are you going to get a 4-5% return.... True, but that is not so good when the value of the municipal bond tanks once Tbonds start providing higher yields as the markets are all inter-related... Looking at TBond prices, they are at all time highs, with interest rates (yields) essentially approaching zero...

 

I spent alot of time explaining it to him and he still didnt get it.... He just kept re-gurgitating the "but where else are you going to get that kind of return".... I don't care about the "return" if there is significant risk of initial capital involved... Like missing the forest through the trees...

 

Folks, going to advisors that have no clue about markets are like sheep being led to the slaughter..... If you have money, learn to invest it for yourself, dont delegate your money out unless you have seen a track record that proves the advisor knows what he/she is doing... Otherwise, the old saying goes; "a fool and his money are soon parted"....

[jonbig04 10]

I personally think investment advisors are a crock of shit, most of them, know nothing about fundamentals or technicals and are just pedaling whatever their firm tells them to push...

 

For instance i have a friend of mine who works for Fidelity or one of these other investment services... He was telling me that now is a good time to get into 30 year municipal bonds.... Now, in my head, in the next 5-10 years shorting bonds at their present highs, is a no brainer, as they are a market like any other.... But, his take was where else are you going to get a 4-5% return.... True, but that is not so good when the value of the municipal bond tanks once Tbonds start providing higher yields as the markets are all inter-related... Looking at TBond prices, they are at all time highs, with interest rates (yields) essentially approaching zero...

 

I spent alot of time explaining it to him and he still didnt get it.... He just kept re-gurgitating the "but where else are you going to get that kind of return".... I don't care about the "return" if there is significant risk of initial capital involved... Like missing the forest through the trees...

 

Folks, going to advisors that have no clue about markets are like sheep being led to the slaughter..... If you have money, learn to invest it for yourself, dont delegate your money out unless you have seen a track record that proves the advisor knows what he/she is doing... Otherwise, the old saying goes; "a fool and his money are soon parted"....

 

I couldn't agree more. I'm not really talking about people like us who live in the markets, but the blue collar people who think their financial advisers know what they're doing. The truth is if those guys could make money in the market they wouldn't be advisers. They have no incentive to perform because they get paid regardless. Federal laws prohibit normal people from being able to take advantage of performance based managers, which is complete BS to me.

 

My point is that if buy and hold is dead (let's face it, that's all most financial advisers know how to do) where do lay people go with their money?

[karim0028 10]

I couldn't agree more. I'm not really talking about people like us who live in the markets, but the blue collar people who think their financial advisers know what they're doing. The truth is if those guys could make money in the market they wouldn't be advisers. They have no incentive to perform because they get paid regardless. Federal laws prohibit normal people from being able to take advantage of performance based managers, which is complete BS to me.

 

My point is that if buy and hold is dead (let's face it, that's all most financial advisers know how to do) where do lay people go with their money?

 

They go to the wolves.... Sorry, not trying to be coy or anything.... NO ONE has any incentive to make YOU more money than you; unless your Buffett your not going to get that kind of attention...

 

The system is setup that way... Its made so that you are always invested and the pro's are the one's that make the money in fees and speculation..... I'll give you an example.. I had a 401k plan paid for by a company i work for, completely provided by them, i didnt add anything to it... I noticed the market beginning to turn and i wanted to sell it and go to cash, i wasnt allowed to, it had to always be invested.... I had to watch it lose half its value...

 

Another example, i dont remember where i read this, but, Blackrock group is a private company setup by one of Bush's friends; made specifically to manage SS funds... How hard can it be to make money, when the company is setup specifically for that purpose and when that funnel of money is being pumped into your company every 2 weeks?

 

Do they have to get a great return? Nope, just keep pace with the market...

[sevensa 10]

The system is setup that way... Its made so that you are always invested and the pro's are the one's that make the money in fees and speculation..... I'll give you an example.. I had a 401k plan paid for by a company i work for, completely provided by them, i didnt add anything to it... I noticed the market beginning to turn and i wanted to sell it and go to cash, i wasnt allowed to, it had to always be invested.... I had to watch it lose half its value...

 

Let's be fair here. This is not the "system" that is setup this way. This is your company's 401K plan that sucks. Most 401K plans include a Money Market fund that you can use to go to cash. Or worse case, you could have moved to one of the bond funds. You might still have lost money, but not half the value.

 

Blaming the "system" is always the easy out, but if you just take the time to investigate further, you will many times find other options than throwing your hands in the air and blame the system.

 

Also don't be so quick to cast all financial advisors under the same net based on the handful you know. I know a couple of good ones that I respect, but I am not so naive to think this means that all of them are great. Just as I wouldn't think all of them are useless because I happen to know few who are.

[jonbig04 10]

Let's be fair here. This is not the "system" that is setup this way. This is your company's 401K plan that sucks. Most 401K plans include a Money Market fund that you can use to go to cash. Or worse case, you could have moved to one of the bond funds. You might still have lost money, but not half the value.

 

Blaming the "system" is always the easy out, but if you just take the time to investigate further, you will many times find other options than throwing your hands in the air and blame the system.

 

Also don't be so quick to cast all financial advisors under the same net based on the handful you know. I know a couple of good ones that I respect, but I am not so naive to think this means that all of them are great. Just as I wouldn't think all of them are useless because I happen to know few who are.

 

I think it's absolutely a system. The top 10% of income earners own 90% of the stocks. Sure not all financial advisers are bad. But someone who is performance based is going to work much harder than someone who gets paid regardless of what happens to y our money. That's a no-brainer. Yet unless you are pretty wealthy, you aren't even allowed to take advantage of performance based money managers.

 

This because such managers are seen as "too risky" for every day investors. Risky is handing your money to someone who has zero accountability and using a strategy like buy and hold.

 

I'm not saying there some group of conspirators out there or anything like that, just that the world of finance is set up in such a way that is it tough for a layperson to get anything past mediocre performance, if that.

[karim0028 10]

Let's be fair here. This is not the "system" that is setup this way. This is your company's 401K plan that sucks. Most 401K plans include a Money Market fund that you can use to go to cash. Or worse case, you could have moved to one of the bond funds. You might still have lost money, but not half the value.

 

Blaming the "system" is always the easy out, but if you just take the time to investigate further, you will many times find other options than throwing your hands in the air and blame the system.

 

Also don't be so quick to cast all financial advisors under the same net based on the handful you know. I know a couple of good ones that I respect, but I am not so naive to think this means that all of them are great. Just as I wouldn't think all of them are useless because I happen to know few who are.

 

Perhaps i am presenting it in a little of a jaded fashion... But, the markets by nature fluctuate and crashes do occur, i dont blame any body, quite honestly, i dont hold any equities and havent for several years, since for me the risk outweighs dividends and upside potential at this point, etc.. It just doesnt fit into my market view now... The account i was talking about was fully company funded, i manage my own assets.... Perhaps I am paranoid I started buying gold last year for a longer term hold against the soon to be debased currency....

 

What i am stating is that essentially, unless you follow some financial advisor who has proven himself like Marc Faber (or whoever you trust and makes sense to you) or someone along that caliber; some one from the likes of Fidelity (ie. cookie cutter) is usually just pitching his book (which he cant deviate from) and you will ride the rollercoaster up and all the way back down; erasing a generations worth of savings and profits..... Rarely will they ever tell you that its best to stay in cash, they dont make money keeping you in cash... A blatant conflict of interest... Obviously, not every advisor is an idiot, for every 4 idiots, there is that one diamond in the rough...

[karim0028 10]

To add to it; i think a financial advisor should have a good understanding of monetary an economic theory not just parrot company pushed stock picks...

 

A recent and pretty blatant example is gold, how many mainstream advisors have put clients

into gold? Over the last 10 years gold has jumped 300-400%, while stocks went down by 50% and the dollar has gone down by ~20% this year alone.... I dont know any advisor aside from advisors for high net-worth folks who mention it.... Most, still know nothing of it... They will put you into what produces fees.

 

I am of course talking about investing, nothing what so ever to really do with day to day trading... I am a big believer in doing my own homework....

[sevensa 10]

I think it's absolutely a system. The top 10% of income earners own 90% of the stocks. Sure not all financial advisers are bad. But someone who is performance based is going to work much harder than someone who gets paid regardless of what happens to y our money. That's a no-brainer. Yet unless you are pretty wealthy, you aren't even allowed to take advantage of performance based money managers.

 

This because such managers are seen as "too risky" for every day investors. Risky is handing your money to someone who has zero accountability and using a strategy like buy and hold.

 

I'm not saying there some group of conspirators out there or anything like that, just that the world of finance is set up in such a way that is it tough for a layperson to get anything past mediocre performance, if that.

 

My remarks were pointed at blaming the "system" for losing 50% of a 401K when other options were most likely available.

 

But since you bring it up, where do you get the information from that top 10% of income owners own 90% of the stocks? I would think that mutual funds would be closer to have this distinction.

 

You are confusing money managers with hedge funds. There are plenty of other programs like managed futures accounts for example that is available to pretty much anyone who can afford the minumum deposit. If you look at hedge funds track records, they are not really that spectacular on average and the good ones have such high minimum deposits that the average person probably couldn't afford this anyway, even though they might be allowed to. From that viewpoint I can understand why "they" are trying to protect the average person. The average person might scrape enough money together to invest in such a fund, but is this really a good idea to invest all your money in one place? I think, the assumption is that the minimum deposit would be a smaller percentage of a qualified investor overall net worth. Of course, they still can be stupid and still invest everything, but no system is perfect and I would venture to say that the system probably protects more than it hurts.

 

I also wouldn't agree that this is a no brainer that someone getting paid based on performance would work much harder than one who doesn't. This depends on your definition of working harder. I'm pretty sure that many of fixed fee managers would be working harder to justify getting paid every month and might be more accessible to client and more customer service orientated. Someone who get paid on performance, might have the attitude that as long as they make money, they don't need to care about the customer any further. Just depends what you want.

 

I consider myself a layperson and arrived in the US 13 years ago with $800 in my pocket and two suitcases. Attached is a monthly equity graph of one of my IRA accounts compared to the S&P that I've been trading since 2008 based on a swing trading method. Not earth shattering results as this is my retirement money and I am content with smaller consistent performance, but I would be so bold to say still better than mediocre performance. I'm not privileged or a top 10% earner and if I can have better than mediocre results, there is no reason that anyone else cannot either.

 

Seems like you are making a lot of assumptions about the "system". The "system" is the same for everyone. If one person can succeed under it, there is no reason that you cannot as well. Blaming the system, the weather, your parents, the guy in middle school who stole your lunch money, your 11 toe, is always easier than to take responsibility. This is easy to complain and point fingers, but at the end of the day, you have no idea how fortunate you are to live in a country like the US. Do yourself a favor and travel to some of the less fortunate countries and you will quickly realize how lucky you are.

 

Ok, I'll get off my soap box now.

[karim0028 10]

My remarks were pointed at blaming the "system" for losing 50% of a 401K when other options were most likely available.

 

But since you bring it up, where do you get the information from that top 10% of income owners own 90% of the stocks? I would think that mutual funds would be closer to have this distinction.

 

You are confusing money managers with hedge funds. There are plenty of other programs like managed futures accounts for example that is available to pretty much anyone who can afford the minumum deposit. If you look at hedge funds track records, they are not really that spectacular on average and the good ones have such high minimum deposits that the average person probably couldn't afford this anyway, even though they might be allowed to. From that viewpoint I can understand why "they" are trying to protect the average person. The average person might scrape enough money together to invest in such a fund, but is this really a good idea to invest all your money in one place? I think, the assumption is that the minimum deposit would be a smaller percentage of a qualified investor overall net worth. Of course, they still can be stupid and still invest everything, but no system is perfect and I would venture to say that the system probably protects more than it hurts.

 

I also wouldn't agree that this is a no brainer that someone getting paid based on performance would work much harder than one who doesn't. This depends on your definition of working harder. I'm pretty sure that many of fixed fee managers would be working harder to justify getting paid every month and might be more accessible to client and more customer service orientated. Someone who get paid on performance, might have the attitude that as long as they make money, they don't need to care about the customer any further. Just depends what you want.

 

I consider myself a layperson and arrived in the US 13 years ago with $800 in my pocket and two suitcases. Attached is a monthly equity graph of one of my IRA accounts compared to the S&P that I've been trading since 2008 based on a swing trading method. Not earth shattering results as this is my retirement money and I am content with smaller consistent performance, but I would be so bold to say still better than mediocre performance. I'm not privileged or a top 10% earner and if I can have better than mediocre results, there is no reason that anyone else cannot either.

 

Seems like you are making a lot of assumptions about the "system". The "system" is the same for everyone. If one person can succeed under it, there is no reason that you cannot as well. Blaming the system, the weather, your parents, the guy in middle school who stole your lunch money, your 11 toe, is always easier than to take responsibility. This is easy to complain and point fingers, but at the end of the day, you have no idea how fortunate you are to live in a country like the US. Do yourself a favor and travel to some of the less fortunate countries and you will quickly realize how lucky you are.

 

Ok, I'll get off my soap box now.

 

 

I wouldnt consider you a lay person Sevensa..... Anyone involved in the markets is not a layperson... Great job by the way on your IRA..

 

You understand the ins and outs of the market; a layperson deposits money into his 401k and takes a shot in the dark at what to invest it in...

 

BTW, in my case, there were no other options available... 100% invested in company stock, come hell or high water Due to the fact that it was the company putting in the money.... Trust me, i tried to go in cash, nope, not an option...

[brownsfan019 17]

Oh the things I could tell you guys about about brokerage firms REALLY work...

 

I've mentioned this here before, but prior to going full-time in my trading, I was one of those brokers you love to hate.

 

And the stories I could share with you would take me days and days to compile.

 

I'll try to keep this short as I really don't feel like getting in a massive rant tonight...

1) No one will care for your money more than you.

2) Brokers get paid when you buy/sell something or remain in the investment itself (as many pay trailers or ongoing fees as long as you stay in the investment).

3) Brokers earn ZERO if you sit in cash waiting for the optimal time to enter.

4) Brokers get paid regardless if you make money or not.

5) Mutual funds and annuities are the biggest ripoffs in the world and they've done a marvelous job at smoke screening how that industry actually operates.

I sold everything and sold it to completely uneducated people (on this subject) to those that had some knowledge and in the end, if you didn't buy, I didn't make any money. The markets at a high and could easily retrace? So what, buy today. Bonds are overvalued and will probably plummet in value soon? So what, get the return today. This CD we are selling is going to tank as soon as the fed raises rates? Oh well, just buy today b/c my quarter ends tomorrow and I gotta get this sale in to count for the vacation contest going on. This mutual fund has high fees and piss poor performance? But look at these pretty brochures they crank out and if I sell enough of them, they are going to send me some neat free stuff and probably send me on a vacation or two this year.

 

Here's what I tell anyone that will listen when it comes to what the average person should invest in - a few ETFs. That's it. Buy a nice basket of 3-5 ETFs and reinvest everything. Dollar cost average into it if you can.

 

Is buy and hold dead? I say no and that's b/c the majority of people out there have done it, will do it, will continue to do it and will teach their kids to do it. "Active" investing is an oxymoron to most people. If you are investing, you are not active in any way other than checking your statements (if you do that).

 

If you've never been in that industry, I suggest staying out of it. I saw so much crap being peddled it's not even funny. This was part of the reason I wanted out. I'm a very loyal person and was a loyal employee until I really saw what was going on. Then I spoke my mind and shortly thereafter I was being guided to the door... I was tired of playing the game. Any idea what it's like to go to bed wondering if that retiree's IRA you just brought over will do ok with the stuff your firm is selling that month? ....

 

 

It eats away at you and I got out before it was too late.

 

Regardless, tell your non-trading friends to educate themselves on ETFs and then use them. If their company has a 401k and offers a match, use it! That's free money! Even if the funds are terrible, you can probably park it in a money market account. And if you really want to educate them, after they learn about ETFs, teach them how to buy puts on those ETFs so that they now have 'insurance' on their money. It will blow their minds.

 

That's enough for tonight. A nice stroll down memory lane there. lol

[karim0028 10]

Thanks Brownie Just what i was trying to say; only coming from a previous insider... All you have to do is look at the blatant conflict of interest; if that doesn't spell it out for ya, i dont know what will...

[brownsfan019 17]

Thanks Brownie Just what i was trying to say; only coming from a previous insider... All you have to do is look at the blatant conflict of interest; if that doesn't spell it out for ya, i dont know what will...

 

No doubt. It's too bad the general public doesn't get it...

 

Broker = makes money if you make money.

Broker = makes money if you lose money.

 

hmmmm

 

[DugDug 10]

is this a topic about buy and hold or broker bashing?

 

We all know the only person who is ultimately responsible for your economic investments is you, the question is how active do you want to be or how passive.

[karim0028 10]

is this a topic about buy and hold or broker bashing?

 

We all know the only person who is ultimately responsible for your economic investments is you, the question is how active do you want to be or how passive.

 

Thats the point, i say you have no choice but be active.... if you leave it to a broker or a fund, then you get what you get, they will never care about your investments as much as you do.... Just ask half the country that sat through a 50% decline and then a 50% retracement of a 50% decline....

 

I dont ask a realtor if now is a good time to buy and i wont ask a broker (or anyone who makes money off me if i do buy) that question...

[brownsfan019 17]

is this a topic about buy and hold or broker bashing?

 

We all know the only person who is ultimately responsible for your economic investments is you, the question is how active do you want to be or how passive.

 

DD - Sorry if my rant got off track, but the key is this IMO - buy and hold is alive and well and always will be, b/c of how the brokerage business is structured currently.

 

Brokers, which control billions of investment dollars, preach buy and hold; which in turn keeps the buy and hold dream alive for the majority of people.

 

So IMO buy and hold will always be the primary strategy of investing while the brokers/funds continue to make money regardless of performance - and actually have a huge motivation to keep you in the funds at all times.

 

Until the brokerage system is set up to compensate based on returns, buy and hold will be alive and well. They sell buy and hold as the 'approach' and then it so happens that the 'approach' coincidentally compensates them the largest way possible.

[DugDug 10]

To be fair - brokers dont promote buy and hold - they promote you trading - thats how they make money.

buy it "cher-ching" - oh look its gone up - buy some more, oh your not bullish then you should sell it - "cher-ching"

 

And given the discount brokerage these days and the fact that we are all benefiting from it I dont see how any one can really complain - no one forces us to trade.

 

Its more the fund mangers who are long only that promote buy and hold.... as this is where they gain the fees, and this is where when they have terrible performance they just say how they performed in line with the market.

The reality is that for the billions of dollars they have to be buy and hold. whereas we as individuals if we do our own work dont have to be.

 

(cher-ching the sound of a cash register ringing)

[brownsfan019 17]

To be fair - brokers dont promote buy and hold - they promote you trading - thats how they make money.

buy it "cher-ching" - oh look its gone up - buy some more, oh your not bullish then you should sell it - "cher-ching"

 

And given the discount brokerage these days and the fact that we are all benefiting from it I dont see how any one can really complain - no one forces us to trade.

 

Its more the fund mangers who are long only that promote buy and hold.... as this is where they gain the fees, and this is where when they have terrible performance they just say how they performed in line with the market.

The reality is that for the billions of dollars they have to be buy and hold. whereas we as individuals if we do our own work dont have to be.

 

(cher-ching the sound of a cash register ringing)

 

To clarify, there are 3 distinct business organizations we can talk about:

 

1) Full Service Brokers

2) Discount Brokers

3) Money Managers (mutual funds, annuities)

 

General public will use #1 or #2. If they use #1 they will often then have their money directed into #3 b/c the fees are very nice there for broker and money manager. #1 is going to steer you to 'managed money' products, such as mutual funds, wrap accounts, annuities, etc. Basically anything that charges you fees up front, while you own it and/or when you sell it. They are beautiful products for the broker - do nothing and get paid every single month.

 

If you use a full service broker, you will in fact be sold buy and hold b/c they want you to buy some expensive product and they want you to hold it for as long as you can deal with the ups and downs so they get paid every month. Full service brokers make next to nothing on individual stock trades. The firm provides incentives for you to direct people to products that the 'professionals' manage... and that is open for debate since the majority of funds don't beat the S&P.

 

Discount brokers typically provide little to no advice and they are just there to get your commissions.

[james_gsx 16]

I think this all depends on how what you consider "buy and hold." I think it's kind of a silly idea to buy something and expect it to go up in value forever, we all know that doesn't work.

 

But that doesn't mean a well diversified portfolio doesn't work. Obviously, it depends on how you diversify that portfolio. This means, US equities, International equities, US/Int'l FI, Alternative (hedge funds, private equity, etc), commodities, etc. If you would like, I could go into more detail on this and provide those who care with PDFs (it's not my stuff, don't worry).

 

I think one of the biggest problems with buy and hold is the risk you are exposed to in various market events (beyond 3 standard deviations). In those cases, you typically see a decades worth of gains wiped out in about a year. Also, a lot of portfolio managers are obsessed with keeping a constant allocation, and will adjust quarterly. This can be deadly, especially in markets like 2008.

 

I also agree with Brownsfan that most mutual funds are junk. You have to be careful since many "advisors" are looking for fee's, and will get special deals on certain bonds to rack up more fees. This is all on top of the 100bp to manage the money. You can build an efficient portfolio with ETFs and keep the expenses very low.

 

Edit: There has also been talk of MPT being "dead", and people moving towards "tactical asset allocation". But is this a fine line with trading?

[DugDug 10]

BF - every country is clearly different and I guess the stock brokers have changed recently (last ten yrs) I forget that even the banks and larger brokers are pushing people into charging you 1%+ to allow them to manage your money just so they advise you to go into a fund that charges another 1% to match an index!

(Many of the brokers I know are still old school independents who get paid per trade.)

 

These are separate again from the independent financial advisor's who are really incentivised to put clients into the funds as they receive a kickback - whoops I mean rebate - to put clients into certain funds. The worst of these guys will get you to roll every 3-5 years as they also get the rebate from the up front fees - if there are any. So even then you dont get any benefit from the buy and hold strategy. - double doh!

currently there is a push to ban these rebates in the UK from 2013 onward I think.

 

While there are definitely a lot of capable advisor's/broker/managers etc; the industry kinda does create the incentives to clip fees...... but mainly again as most people cant be bothered to do their own homework - they would rather watch TV on the weekend for 10 hours a day (not including Browns fans)...... so who is to blame.

 

Regards a well diversified portfolio approach -well yes that will help spread the risk (not necessarily reduce it ) but it will also ensure that you dont achieve much in the way of great returns unless your asset allocation is spot on - and I think a lot of research tries to show that asset allocation is what makes up the vast majority of good returns (??)

funny that as traders (mainly short term) here most people are specialising and not diversifying..... Buffett and Soros and most of the others will tell you the same - dont.

But again - it all depends on how much work you wish to do.

 

So is buy and hold dead..... it should be if you are not too lazy, you truly believe that people can outperform the market over the long term via active management and you have the risk tolerance to be proved wrong.

[james_gsx 16]

Regards a well diversified portfolio approach -well yes that will help spread the risk (not necessarily reduce it ) but it will also ensure that you dont achieve much in the way of great returns unless your asset allocation is spot on - and I think a lot of research tries to show that asset allocation is what makes up the vast majority of good returns (??)

funny that as traders (mainly short term) here most people are specialising and not diversifying..... Buffett and Soros and most of the others will tell you the same - dont.

But again - it all depends on how much work you wish to do.

 

 

I think that's a mistake many traders make, not necessarily a bad thing. You try to make money everyday from the markets, and thus should have higher returns then the index. But a retirement portfolio is a much different story.

 

I have a portfolio sitting in front of me that is well diversified (70/30 split with core and satellites and it's incredibly easy to model) and it's generated $1.7M more net worth (with the same volatility 11%) compared to the S&P 500 since 1972 - which includes several major draw downs. Obviously you won't be immune to risk when everything falls (2008). I'm not saying this is the only portfolio that works, but it's a simple example.

 

So yes, it is possible to build a portfolio and adjust it accordingly as time goes on, that will stand the test of time (I have inflation data too if you'd like). This doesn't mean it's immune to risk, but if you are able to adjust then theoretically you should be okay. I would even go as far to say it will last longer than 99% of retail trading accounts over a 30 year period.

 

Don't worry guys, I'm not jumping on the long term bandwagon, but I will stand my ground that a long term diversified portfolio does work. That doesn't mean trading is dead, but it means there is room for both.