Why Buy and Hold Investing Is a Flawed Concept
Preparing for an Uncertain Retirement
North Dallas i March 9, 2019
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AMG funds came out with a statistic that I think illustrates the problem with buy and hold investing.
"A person with $1 million invested 100% in the S&P 500 as of 1/01/73 withdrawing an inflation-adjusted $100,000 per year would be out of money in 9 years, i.e., as of 12/31/81. A person with $1 million invested in the S&P 500 as of 1/01/82 withdrawing an inflation-adjusted $100,000 per year would have $4.59 million remaining after 37 years, i.e., as of 12/31/18. This calculation ignores the ultimate impact of taxes on the account which are due upon withdrawal, is for illustrative purposes only and is not intended to reflect any specific investment or performance. Actual results will fluctuate with market conditions and will vary (source: BTN Research)."
The concept of buy and hold is pretty simple. You are a long-term investor who invests money into good investments and you hold onto those investments no matter the market conditions. You never sell those investments. If the market is crashing all around you, you stay persistently invested no matter what.
Pop culture finance backs up the theory of buy and hold with statistic after statistic preaching why it is a no brainer and the only way to invest.
When it works, it works! When it doesn't work, it is a disaster and maybe even a game changer.
Here is the problem - when you practice long-term, buy and hold investing it becomes a habit and a mindset. You know nothing else. It is your only investing experience. Thus, you practice it because even though you went through disastrous times as an investor through out your lifetime of investing, the market always came back given time.
The truth is the market goes through cycles both good and bad. If you don't need the money, you can survive the cycles. What do you do when you need the money? Going back to the example above - the guy who needed it practiced buy and hold investing and lost it all in 9 years. He was the unlucky recipient of the bad cycle. The person who needed it in 1982 was the recipient of a good cycle. It was purely luck and timing. The unlucky investor did only what he knew.
I would suggest that if the investor who lost it all practiced something other than buy and hold maybe he survived the bad cycle. Maybe if he would have practiced the habit of Plan A investing when the market went up and Plan B investing when the market went down he would have survived and thrived.
The moral of the story is that to be successful you have to have more than one investment strategy because the market doesn't always go up. It comes down to your habits.
To learn more about Plan A and Plan B investing, come join us at our next workshop. Click here to register!