Loss of Faith in Buy and Hold

Buy-and-hold investing seems to always evolve into buy-and-fold. The following data on October mutual-fund redemptions was sent by Som Seif of Claymore Investments:

- in Canada, net outflows from mutual funds in October were an estimated $8.2 billion to $8.7 billion – the largest in history

- in the U.S., outflows from equity funds ballooned to a record $70.7 billion (U.S.) last month, according to data from TrimTabs — 26% higher than in September, the previous record high.

People are not only showing a loss of faith in buy-and-hold investing by their actions but are also verbalizing their disenchantment, as discussed in this article.

A reservation I personally hold about the “stocks for the long run” view is that it’s based on inductive reasoning, i.e. it extrapolates what has been seen in the past to the future. In other words, there is no mathematical certainly of receiving an average annual return of 7% to 9% over the long run. Indeed, as discussed in this piece, “black swans” can appear and drag long-run returns below other assets or even breakeven.

Last year, I took a whimsical poke at buy-and-hold investing in “Indexing a portfolio to financial Armageddon.” It doesn’t look so whimsical now, unfortunately. The point is not that stocks should be avoided. There is a place for them in portfolios but I would tend to differ with those who recommend investing 100% in stocks (or otherwise very large exposures). I personally would prefer to be diversified over other assets just in case my 15- to 30-year investing horizon turns out to be the one with flat or negative returns in the stock market.

Comments

[MarvinMBA:]

Do you think the economy will survive without going into a Depression?
I suppose with all the bad news that seems to come out of the woodwork on a daily basis the end is here. Do you think you will ever get a job again after the unemployment numbers come out tomorrow. The conclusion might be never. With the above conclusions how will you eat???? Food Stamps? What about food and clothing and a place to live?? What else can happen to your life??? After having said all of the above if you have any spare cash buy GE which will be a major beneficiary of any downdraft...rememeber we have to rebuild our intrastructure and become energy independent so there will be jobs aplenty when the New Administration under Obama gets things going.

2008 Nov 07 12:35 AM

[Bull/Bear R...:]

Thank you Larry MacDonald for this report. I'm still trading (cautiously), and I prefer to 'invest' in companies so I don't trade shorts or even options—but I gave up buy-and-hold years ago. I believe it is a myth perpetrated by less-than-competent financial advisors to scare folks away from managing their own money. Even Warren Buffett, who invests for the long term, doesn't just 'hold' -- compare his 2006 portfolio to his 2008 and you'll see a dramatic difference. Also, those who say you don't want to miss the 10 best days of a recovery fail to acknowledge that the 10 worst days will hurt you more than missing the 10 best days will. Don't let the principle shrink.

2008 Nov 07 09:10 AM

[Urbane Gori...:]

Buy and hold only works 1/2 the time. You can hold while the market is going up. But when the market goes down, either you sell at a discount, or the market will take away your value anyway.

jegan

2008 Nov 07 05:29 PM

[investor88:]

Completely agree with Larry's practical approach to investing. Use common sense, not buy and hold or this and that. Sometimes can hold eg Las Vegas Sands going from usd30 to usd150 in a year but better not if you buy it at bargain usd110 and it goes down, now at usd 7!

There is no mathematical law which says you hold till you grow old and get 7% to 10% return p.a., it is a myth. Even Warren shifts his portolio around every so often despite his preferred holding period being eternity.

Jegan's views are quite wise indeed!

2008 Nov 07 07:48 PM