Buy & Hold Investors

Perception vs. Reality

Buy and Hold investing is considered by many to be the holy grail of wealth management.  Its popularity has become a mantra for passive money managers who prefer to “set it and forget it,” relying on diversification and allocation to protect and grow their money.  And those who question this beloved strategy are often derided and dismissed.

Fortunately, more modern minds have proven there is a smarter, more refined path to earning higher returns than buy and hold – with nearly the same amount of effort.  And SmartStops has captured that intelligence in its data-driven investing tools to help avoid the big “drops,” to more effectively protect your money and thereby grow it faster.

First, ask yourself – Is the stock market the same as it was 20 years ago?  50 years ago?  No, it’s not.  Geopolitical turmoil and global economic storms have become the norm.  Information and disinformation fly across the internet 24 hours a day.  Equilibrium and orderly markets are myths. Investors need to be far more flexible than they have in the past and embrace asset protection in a modern, sophisticated way that can counter these more and growing volatile forces.

Buy & Hold investors spend large periods of time recovering losses and not compounding wealth.” 

The old approach of Buy and Hold encourages investors to just ride the ups and downs in the market.  “Don’t worry,”  Wall Street big firms and so-called experts will tell you, “it will eventually recover.”  Buy & hold investors are STILL being told to sit back and take the pain, even if that means their portfolios are underwater for years!

But the only thing this approach guarantees is that investors will spend large periods of time recovering losses and not compounding wealth.

Did You Know?

  • 2 out of every 5 stocks lose money over time.
  • Nearly 1 out of every 5 stocks loses 75% or more of their value.
  • Almost 2 out of every 3 stocks under-perform the index averages.
  • The top 25% of stocks accounted for all of the gain in the Russell 3000 from 1983 to 2007.

Source: Post by Mebane Faber at World Beta highlighting research by Eric Crittenden and Cole Wilcox from Blackstar Funds

From Our Blog

Comparing Tradestops vs SmartStops

First, SmartStops.net was created and launched in 2008, because we felt the market (and providers like Tradestops) were not providing a very sophisticated approach.  And fast-forward 10 years...

The 6 Biggest Mistakes Ordinary Investors Make

"What's the biggest threat to achieving financial independence?  Your own brain!"   Nobel-winning prize theory and research from psychologists (Kanheman & Tversky)  led to the beginnings of what...

Aviva finds sell-side research to be flawed – October 2017

Survey of 342 analysts by Aviva Investors found sell-side research to be flawed, short term and incomplete. “Sell-side research has a significant influence on investors’ decision-making. But our...

Why Protect? Limits of Diversification from State Street

Great white paper by State Street Global Advisors that highlights the limits of diversification and the importance of risk protection:    "Good downside protection can benefit portfolios in several...

Asset Allocation is in Serious Decline

As the CIO of Sungarden Fund Mgmt writes:  "MPT works well in strong markets and over periods of declining interest rates.  This decade will likely see the turning point of that story, and I suspect...
Consider the very material gap in growth (and loss of returns!) in the chart below  if your portfolio was to do nothing more than sidestep market downturns, due to simply compounding more money rather than less. Forget picking winners – just avoiding the losses experienced with Buy & Hold can drive substantially greater portfolio growth.
Now, think of who benefits the most from ensuring funds are not withdrawn from the market?  It is those same Wall Street firms. Take mutual fund promoters – they make huge fees out of managing your money and the last thing they want is for it to be withdrawn. Big firms that might even be managing your portfolios also have their trading department playing the short-term swings making a ton of money off your money that is just sitting there.   Investors need to wake up!
Unfortunately, it’s not what they tell you that’s the problem – it’s what they don’t tell you about Buy & Hold that will cost you money.
Market volatility in today’s investing environment is unavoidable and modern portfolios should have systems for how to deal with it. And as the world’s most successful investors will tell you, having a good system “protects you from yourself” by reducing the influence of emotion or ego that are the enemies of good decision-making in times of turmoil.

SmartStops can be a crucial loss management tool for investors – giving you the system you need to cut losses sooner and improve portfolio returns.

Imagine that your are only down 5% or less while your Buy & Hold friends and colleagues are down twice that during the next major correction!

Imagine if you had sidestepped the downturn of 2000-2001 or 2008-2009 … instead of having wasted five or more years (or worse) recovering your losses. Your portfolio would now be reaching an all-time high!

It’s time to put a more effective investing system in place – try SmartStops for free today and see for yourself.

Still think Buy & Hold is the way to go? Then it’s worth your time to take another minute to digest this next section…

Myths of Modern Portfolio Theory 

It’s important to understand some of the inherent flaws in Buy & Hold logic that will make you think twice about this sacred cow of investment strategy, and investigate deeper with an open mind.

Where did Buy & Hold come from?

In the early 1950’s, Modern Portfolio Theory (MPT) was introduced as the break-through investment management process of the century.  But in today’s 21st century there are some key shortcomings when it is applied to the reality of investing in today’s world. These shortcomings stem from three high-level assumptions around Modern Portfolio Theory (MPT):

1. Diversification works: cross-asset correlations remain constant over a given period.
FALSE

Diversified portfolios don’t protect against increases in volatility. When volatility spikes, most asset classes tend to decline in unison, as correlations rise. The diversification investors thought they had quickly disappears. The recent financial crisis clearly showed that just relying on diversifying does not offer sufficient protection during crisis periods.

2. Drawdowns do not matter: portfolios recover quickly.
FALSE

First, it is important to understand that draw downs are occurring much more frequently then one may realize. Second, as your portfolio drops or you lose your unrealized gains, the fact is that it takes that much longer to recover. This is known as the asymmetry of losses.

3. The Risk of Assets is always justified by the reward: market growth is constant.
FALSE

Market growth is not constant as this chart shows you. And we all know that no one can predict the future.

When the USA went off the gold standard in the 1970’s, this has fostered an environment where money can just be printed and markets can be boosted artificially by many non-transparent actors including central banks around the world.

In addition, the idea that every year is a good year to own stock is completely false.  The facts are well researched and proven that the risk of buying and holding securities is not justified by the reward under certain conditions (and these conditions are completely knowable without the benefit of hindsight).  Further, there is no admission that stocks are ever “expensive or inexpensive”.  Investors are encouraged to always buy stocks in existing Buy and Hold model, no matter what the value characteristics of the stock market happen to be at the time.  Worse,  the suggestion is to invest more if the price drops otherwise known as dollar-cost averaging.

For this and other myths, read this excellent 3rd party white paper.

Start building wealth smarter

Let SmartStops help you put a proven, intelligent risk management solution in place – to give you a distinct advantage over Buy & Hold.  Build a plan in advance so you know when to buy , when to sell and when to hedge.  Create your own customized portfolio with automated monitoring and alerting that’s built for the modern economic markets.  It’s now easy to do far better than Buy & Hold with nearly the same amount of effort – you don’t want to just “ride out” the next downturn again, do you?

Move from Buy & Hold to Buy & Protect

with SmartStops as Your Safety Net!

Share This