Within the investment industry, one way of thinking is that a buy-and-hold strategy is the safest way for investors to secure the highest probable returns. Simply put, this is not so.
Though the approach may be appropriate for some investors some of the time, it is not a cure-all for portfolio growth. It remains popular because of several investment myths that have been passed uncritically between some investment product companies to advisors and planners to investors. Here’s a breakdown:
Myth: For best returns, buy and hold
The traditional view holds that the more time you spend in the market, the more money you will make—the highs and lows balance out, the market rises overall, ergo, so will your profits. This approach essentially says that should keep your money in the market and trust in the long term.
Unfortunately, this is only half the story.
The traditional view is usually premised on an 89-year snapshot of the market, a timeframe that is irrelevant for most investors. Consider that your first 20 or 30 years of life are spent growing and learning, and then establishing your career. During that time (and likely for some years after) you may or may not be in a position to invest. Once you do, you’ve likely got 30 or 40 years before your retirement provided there are not resets (divorce, job losses, health issues etc.).
Reality: Sequence of returns is luck of the draw
So while the market in aggregate may go up over the traditionally shown 89-year period, the market of an individual investor is, in reality, a smaller 30-year timeframe. An investor’s Personal Period of Return™ might come at a time of steady market increases, but it could also come at a time of extreme market volatility.
In short, when you were born and when you start to invest impact where your "Personal Period of Return™ falls, and you must manage your portfolio according to the mood and churn of that 30-year (on average) market environment.
Myth: Your returns will be lower if you’re out of the market
The buy-and-hold investment myth is further propped up by the belief that being in the market for its best days is critical to reap the benefits of the market’s greatest gains. By this logic, taking your money out at any time risks that you will miss one of these “best days” and thereby injure your portfolio.
What’s not emphasized is that the buy-and-hold strategy also guarantees that you’re in for the crashes too. Staying in means your portfolio will likely be affected by the market’s best and worst days. If the crash happens at the end of your Personal Period of Return™, that could be the end of retirement as you’ve envisioned it.
Reality: Your returns could actually be greater
Now, it is true that if you miss all of the best days and are in for the worst, your returns will be lower than if you had bought and held.
What’s seldom pointed out is that if you miss all of the worst days but are in for the best, your returns will be substantially higher. The problem is that the market’s best days occur very close to its worst, usually shortly after a crash. This makes it nearly impossible to miss all of the best or all of the worst days exclusively.
This would seem a strong point in support of buy and hold. But, what would happen if you were to miss the best and the worst days? CERTIFIED FINANCIAL PLANNER™ Paul Gire found that being out of the market for both extremes can produce a greater return than buying and holding.
In short, Gire found both types of days happen during crashes. Both Gire and Squire found, separately, that marrying the two philosophical strategies historically produced much better results when back-tested.
The investment industry is – unfortunately – full of myths and misinformation. Many commonly held beliefs aren’t relevant or correct for individual investors. Buy-and-hold is one such myth. To protect your portfolio and your Personal Period of Return™, weathering the highs and lows of the markets may not be the best strategy. Your best bet is to talk with a professional financial advisor – one who thinks critically about the common wisdom of the industry, with your unique investment goals in mind.
*According to Paul Gire
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.
Investing involves risk including loss of principal.
Gire, Paul J. “Missing the Ten Best.” Journal of Financial Planning.
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