The end of buy and hold?

Posted by admin on March 4, 2009 in Investment Strategy

I received a cold call last Thursday from an investment advisor that went along the lines of the following (please speak slowly if you are cold calling me!): Hi I am Todd from XYZ brokerage house and I represent Mr. Big Time Trader. We are holding a seminar on March 16 on trading strategies now. We believe that the buy and hold strategy is a mantra of the buy and hold strategy that no longer works in current market conditions…”

The caller was basically reiterating one of the larger debates occurring about investment strategies. Mainly, is the buy and hold strategy dead? With once steady stocks like GE on the ropes, can you really hold any stock forever?

Fundamentally, if you are going to abandon one strategy, you need a land on a strategy that is as good, if not better, than the one you are leaving. The real life equivalent would be you don’t quit your job in anger without ideally knowing what you are going to be doing next.

What exactly is the landing spot if you abandon the buy and hold strategy? Most likely an active trading strategy (let’s assume even if you are in all cash, at some point, you will deploy it but shun the buy and hold strategy).

Practically speaking, an active trading strategy has the following implications:

You are become a stock picker OR you delegate that responsibility to a pro;
You are relying heavily on market timing;
Higher trading costs (although on some high MER mutual funds, you may end up ahead); and
Tax inefficiency from active trading (taxes are payable on sales; more sales = more potential taxes)

If you can master or handle the above then shifting from buy and hold to active trading may be a good move. However, most people I know do not have the time, skill, risk tolerance or a combination of all those factors to make active trading work.

What I often feel after these types of cold calls is that the investment industry is saying pick your poison: buy high MER mutual funds or let us soak up commission by actively trading for you. One way or another, we’ll find a way to make money off of you.

Of course, as Canadian Capitalist pointed out, a buy and hold strategy utilizing dollar cost averaging for a broad based index does not yield bad results over the long term.

Maybe that’s why the caller spoke so fast.

9 Comments on The end of buy and hold?

By Canadian Capitalist on March 4, 2009 at 12:17 pm

Great post! You can count on the financial services industry to play on investors fear (or greed in more exuberant times) and tempt them to try a Hail Mary pass. Investors should keep in mind that a Hail Mary rarely works.

By the weakonomist on March 4, 2009 at 2:52 pm

The only reason they pretend to have better investing plans is because they get a cut of every transaction. They’ll BS any kind of strategy to get you from passive to active.

What I tell people who pretend to be good traders is to start a hedge fund if they’re so confident. If you’re good enough, plenty of people will give you their money. If not, you’re full of it.

By admin on March 4, 2009 at 3:10 pm

I didn’t write this in the post but remember how everyone became a day trader in the late 90′s? How many people do that anymore?

History has a way of repeating itself. I suspect the move away from buy and hold will die the same death as it did a decade ago.

By Is there anything better? on March 5, 2009 at 8:45 am

[...] wondering if they should abandon stocks, then, as Thicken My Wallet pointed out in a recent post, investors need to find a better asset class than the one they are abandoning. Which raises the question: Is there any asset class better than [...]

By Dividend Growth Investor on March 5, 2009 at 11:13 am

Theoretically you could use certain mutual funds in a tax defered account at places such as RYDEX to get in/out of certain indexes and sectors. However you need to have a killer sense for market action.

By Jay Currie on March 5, 2009 at 1:27 pm

The strange thing is that given how badly beaten up the markets have been, if you are selective and do your own due diligence, there is every reason to believe buy and hold is exactly the right strategy right now.

If you look at the TSX and TSX-V good companies with real cash flows are seeing 75-90% off their highs. If you stay focused and research hard you will find companies which control solid resources and which will rise quickly as this recession gradually ends.

Make sure they have plenty of cash and no debt.

By Brian on March 5, 2009 at 9:26 pm

Over the long term its difficult to:
1. successfully time the market
2. successfully pick winning stocks

but what we can do as investors is keep our costs down. This naturally leads me to strategies like “buy and hold” indexing.

By Rhonda Sherwood on March 5, 2009 at 9:48 pm

It is important as a client to understand why your advisor or any advisor is recommending that you change your investment process & holdings. There is a lot of desperation out there right now to make money and so hidden agendas will be rampant. Clients need to be extra cautious and do a bit more homework before making any decisions.

By Chad @ Sentient Money on March 6, 2009 at 10:34 pm

Following any one specific strategy “buy and hold”, “day trading”, “Dogs of the Dow”, etc. will always get you into trouble at some point. The best investors are able to adapt and take advantage of whatever environment they are in. Being stuck in your ways is the worst thing you can do as investor, but the hardest thing not to do as a human being.