Proponents of a buy and hold strategy had more convincing evidence years ago, but with the advent of lightning fast information and high-speed trading they no longer have a valid argument.
The buy and hold model pretty much became obsolete when the S&P topped at 1,552 and the NASDAQ topped at 5,132 in January, 2000. In fact, if you had put your money to work - which the greatest number of individuals in market history did - back in January, 2000, you would still be down almost 19% on the S&P and 47% down on the NASDAQ. That's not accounting for inflation; that's pure losses over more than a decade.
So, if you were long stocks and you (or your broker) decided to tough it out when the market began to collapse in 2000, you're very much underwater. If you don't mind being underwater by double digits after 11+ years, then buy and hold is most definitely for you.
Proponents of buy and hold will argue that there's been equally painful periods throughout history where it would have made sense to tough it out. Perhaps, but we're living in a different world now, where hedge funds and individual traders have access to sophisticated data and trading systems that weren't around even ten years ago. So, individuals who try to hold on through thick and thin are now subject to the whipsaw action that's become more the norm rather than the exception. Throw into the equation the ever pervasive effects of world events - i.e. - increased possibility of economic collapse in other countries - and it only increases the likelihood of rapid market deterioration. In other words, the pros today operate on a shoot first, ask questions later mode, thinking in terms of minutes, hours and possibly days, rather than months down the road.
Naturally, such short-term mindedness puts the average individual in a disadvantaged position. So, if you are trying to manage your 401k on your own, you best have a full understanding of what's really going on out there or your portfolio will be eaten alive.
There are plenty of instruments available to the average investor, particularly Exchange Traded Funds, ETF's, that mirror the movement in the market. For example, you can easily buy ETF's that go up or down based upon market action, but simply buying and holding on to those ETF's for a long period of time can be a recipe for disaster. Yes, if you are lucky enough to jump into the market at its bottom (when in fact, that's just about the time when the majority of investors bail out), then holding for a longer period of time could be profitable. But, timing the market perfectly - that is, buying at the exact right moment and selling at the exact right moment - is akin to hitting the lottery.
Thus, I will argue that the average investor will be better off to sometimes be out of the market completely - even if they happen to miss a nice run to the upside - while preserving precious capital that can be put to use when the market is more predictable. Holding in a market that has been down for over a decade makes no sense. It might have worked years ago when there was a more level playing field, but not with today's rapid trading environment that calls for lightning quick decisions.
The buy and hold model pretty much became obsolete when the S&P topped at 1,552 and the NASDAQ topped at 5,132 in January, 2000. In fact, if you had put your money to work - which the greatest number of individuals in market history did - back in January, 2000, you would still be down almost 19% on the S&P and 47% down on the NASDAQ. That's not accounting for inflation; that's pure losses over more than a decade.
So, if you were long stocks and you (or your broker) decided to tough it out when the market began to collapse in 2000, you're very much underwater. If you don't mind being underwater by double digits after 11+ years, then buy and hold is most definitely for you.
Proponents of buy and hold will argue that there's been equally painful periods throughout history where it would have made sense to tough it out. Perhaps, but we're living in a different world now, where hedge funds and individual traders have access to sophisticated data and trading systems that weren't around even ten years ago. So, individuals who try to hold on through thick and thin are now subject to the whipsaw action that's become more the norm rather than the exception. Throw into the equation the ever pervasive effects of world events - i.e. - increased possibility of economic collapse in other countries - and it only increases the likelihood of rapid market deterioration. In other words, the pros today operate on a shoot first, ask questions later mode, thinking in terms of minutes, hours and possibly days, rather than months down the road.
Naturally, such short-term mindedness puts the average individual in a disadvantaged position. So, if you are trying to manage your 401k on your own, you best have a full understanding of what's really going on out there or your portfolio will be eaten alive.
There are plenty of instruments available to the average investor, particularly Exchange Traded Funds, ETF's, that mirror the movement in the market. For example, you can easily buy ETF's that go up or down based upon market action, but simply buying and holding on to those ETF's for a long period of time can be a recipe for disaster. Yes, if you are lucky enough to jump into the market at its bottom (when in fact, that's just about the time when the majority of investors bail out), then holding for a longer period of time could be profitable. But, timing the market perfectly - that is, buying at the exact right moment and selling at the exact right moment - is akin to hitting the lottery.
Thus, I will argue that the average investor will be better off to sometimes be out of the market completely - even if they happen to miss a nice run to the upside - while preserving precious capital that can be put to use when the market is more predictable. Holding in a market that has been down for over a decade makes no sense. It might have worked years ago when there was a more level playing field, but not with today's rapid trading environment that calls for lightning quick decisions.
About the Author
John S. Hopkins Jr is one of the co-founders of Invested Central. John founded the company in 2004 after spending almost thirty years in the financial services sector. John started out by producing and providing educational training programs for financial institutions and their employees. Hundreds of companies and thousands of employees have used his training materials and John has taken this successful experience and now provides educational training to stock market investors.
John S. Hopkins Jr is one of the co-founders of Invested Central. John founded the company in 2004 after spending almost thirty years in the financial services sector. John started out by producing and providing educational training programs for financial institutions and their employees. Hundreds of companies and thousands of employees have used his training materials and John has taken this successful experience and now provides educational training to stock market investors.
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