Does Buy and Hold Still Work?
The financial services industry has gone to great lengths to tell you that you can’t “time” the market, so you must simply allocate assets to stocks and bonds based on your risk level and time horizon and just sit tight and be patient. If the market corrects, “Don’t worry, it’ll come back” is the conventional advice. If we enter a recession, you may be shown a long term chart that will highlight all the recessions of the past 50 years and how every time the market has returned to hit new all-time highs, often in just a few years. Do I think you should try to “time” the market? No, I am not advocating speculation or day trading. I can’t say that strongly enough. However, I do believe that you must have a well thought out hedging strategy if you’re going to be long the stock market. Every investment advisor, including me, uses these words in their disclosure documents: Past Performance Is Not Indicative of Future Results. I think that has never been truer. Over the past ten years, we have seen rising tides lift all boats. The next ten years will be more volatile and difficult for the typical buy-and-hold investor or passive index investor.
Active investment management is not particularly popular right now since passive strategies have outperformed. But I think that is getting ready to change. You should start, if you’re not already, investigating active management and more proactive investment styles. By active management, I am referring to non-indexed securities, picking individual stocks and bonds, allocating to other types of investment products. Now this may sound like a well-diversified portfolio – it is! Diversification is always important, but there are times that the potential upside of being invested in say, high yielding corporate bonds, does not outweigh the downside potential of that category of bonds experiencing a high level of defaults, for example.
If your investment advisor simply has you in a typical 60/40 portfolio and tells you that “We are invested for the long term and the market will come back,” pick up your capital and walk away, or at a minimum seek a second opinion. Investors should have a well thought out exit plan with regard to your holdings and stick to it! Generally, missing some upside is preferable if it means missing or limiting a harsh downside. Remember, in order to make up a -50% decline you need a +100% return. That’s just math.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of the author, and not necessarily those of Raymond James.
This article was written by Gus Vega, Certified Financial Planner, Co-Founder, WealthEngage and Branch Manager with RJFS. He can be reached at 786.264.4954, 9155 S. Dadeland Blvd. # 1014, Miami, FL 33156. WealthEngage is not a registered broker dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.