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Is The 'Best Way To Invest' Always The Best Way?

Oct. 04, 2021 10:07 AM ET9 Comments


  • The last decade has been a boon for the index ETF industry, financial applications, and media websites promoting “buy and hold” investing and diversification strategies.
  • But is the “best way to invest” during a bull market also the best way to invest during a bear market? Or, do different times call for different strategies?
  • Most importantly, investors must realize that surviving the eventual bear market is more important than chasing the bull market.

Boxes of financial products e.g risk, ETFs, bonds, commodity, stocks, REITs, mutual funds on a laptop

William_Potter/iStock via Getty Images

Is “buy and hold” always the best way to invest? It is common to see increasing numbers of articles touting the benefits of “armchair” investing during long bull market advances. The last decade has been

This article was written by

Lance Roberts profile picture

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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Comments (9)

own_account profile picture
Excellent article, I'm semi-retired so my time horizon is short. Even in 120 years about 1/3 of it was 0 return. I trade a conservative iron condor strategy that pays if the market goes up or down. That's because the one thing I'm certain about is that the market will go up AND down.
hawkeyec profile picture
@Lance Roberts

This was a really stunning piece, one of your very best. I especially like your exposure of some of the pitfalls in compounding. More than just market declines can disrupt compounding. Large capital gains can have the same effect. If one has a 500% gain in a stock, for example (I have several such unrealized gains) and wishes to harvest profits, gains taxes can reduce one's capital by quite a bit (at least 20% of the gain amount is lost). Biden's proposed rise in gains taxes will really make that loss of capital very significant. For example I bought MMM@$20 and now it's $175, giving me an unrealized gain of $155. If I sell the stock I'll pay 20% of the gain in taxes, costing me $30 a share, a loss of 17% of my capital and 5 times the current dividend. Depending on the market, as you showed, it could take some time just to get back to even so that all my money can be working again.

You said that buy and hold is the best way to invest, until it isn't. True but context is important. You provided a definition of MPT which is important regardless of how one invests. I started investing before Sharpe had published his method for determining the efficient frontier. Mathematically there are an infinite number of points on the efficient frontier, each of which represents an optimal combination of risk and return. As an investor you can only choose one parameter, either target risk or target return. The market determines the other value for you. For the last two decades my portfolio has operated on the the lower third of the frontier, earning a conservative return at a reasonably low level of risk. As a conservative investor I chose to set my risk parameter goal and let the market provide the best return at that level of risk. Looking at risk in terms of beta, the rate of change in the value of my portfolio vs a benchmark market, say the S&P, has stayed at a beta of 0.5x, give or take, for some time. That means if the market goes up 20%, I go up 10%. On the downside my downdrafts are much less than the market, letting me avoid the compounding trap you illustrate in your piece. My advisor has a sexy tool that he can apply to my holdings that shows two things, my position on the efficient frontier (I am right on the line) and a stress test that shows what would happen to me as a result of various changes in the investment/economic environment. My last stress test showed a couple of potential weak spots so I have tweaked a few things to reduce the risks.

The market isn't an absolute. It contains an infinite number of possible options. To succeed one needs to determine realistic goals and set up a diversified portfolio that achieves them. Remember, the truth is that in the long run the higher the return one seeks, the higher will be the long-run risk to which one will be exposed; denial won't change that. While buying a bunch of stocks or an index fund represents diversification in one sense, the reduction of company risk, the exposure to market risk is absolute because it can't be diversified away. Invest in an index or 30 individual stocks your portfolio will exactly represent the market and behave the same way; beta = 1.0. If the market goes down 40%, you go down 40%. True diversification requires a properly weighted basket of stocks, bonds, R/E, cash, all uncorrelated with each other and diversified geographically, economically, etc. This is the hard part. Hedge funds do just the opposite. They make one or two huge bets and hope they can get spectacular results. Sometimes this works, often it doesn't. Managing for more moderate returns and lower risks may feel boring but the tortoise did win in the end.
OffSiteLocation profile picture
The effect on compound returns from a single years loss in a series was surprising.
WAM002 profile picture
“Time horizons matter”. I think that’s a very important point. It is one I rarely see in most of what I have read. So much for “if you invested $10,000 in 1913…”. Who had $10,000 in 1913? $600 per year? No IRA, no 401k, and huge brokers fees. Fun times. Not to mention you would be well over 100 years old now.
One of the mantras of most financial types is that “you can’t time the market”, and those that try usually miss out on most rallies. If one ascribes to that, then by default one trends toward buy and hold decent investments with occasional tweaking if an investment fails to live up to expectations. In an IRA it is easier to take a cap gain profit if the investment becomes overvalued, less so in a pretax acct where you’re gonna pay taxes. Plus, most people seem to have difficulty pulling the sell trigger on a winning investment since human nature often assumes a winner will keep on winning and beating the avgs.

So, what do you propose doing other than lessening one’s expectations of that long held belief that the sp500 will avg you 8% a year?

dclavijoc profile picture
Your articles always invite to question the status quo and I agree with most of your points in theory and with a historical perspective. But in practice and being prepared for the future, it’s difficult to propose an approach with specific investment ideas different from building a balanced portfolio adjusted for risk tolerance and rebalancing it. If you have a different approach, it means you have a strategy for investing most of your liquid assets generating alpha for decades. Do you have it?
I/we buy quality stocks with dividend growth and most $.$$ in Roth and converted before biden lol. Mostly converted $s and paid taxes from tax accounts as to not dilute the roll IRA $s. No mtg.
@aimepic When I consider Roth conversions and paying taxes even a day before I have too, I find great pause. With the stroke of a pen Congress can impose means testing and simply undo manevers geared toward tax avoidance. Applies to non-Roth as well but it is hard to have confidence that Roth won't eventually be considered under some wealth tax scenario. Am I way off base thinking ? kind of feel like why pay tax before I absolutely must. I live in VHCOL state and got a tax hit when Congress last made changes.They simply changed the rules and, otherwise good, planning became a tax liability. Thoughts?
This is an interesting article, making very good points. In my 30+ years of investing, expectations have almost always been too high, except during a few brief periods of despair. I’d appreciate a little more detail on a couple points.

First, I’m not sure what you mean by a “global asset allocation fund”: I think I get the concept, but could you give us more detail on what you actually used in this modeling?

Second, your ‘buy and hold’ comparator is a single asset, and S&P500 fund. Isn’t that a worst case? I believe (or at least would like to believe) that a portfolio containing some international, some bonds, some cash, perhaps some commodities, is more common, and, with periodic rebalancing, might be closer to a ‘best way to invest always’.
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