Monday, June 11, 2012

“Wake up! Buy and Hold Doesn’t Work”

Robert Laura is convinced that “buy and hold” doesn’t work, which is news to me. I do a lot of reading and make a point of seeking out different points of view. After all, how can you learn something new if you only listen to people who agree with you?

As proof that buy and hold doesn’t work, Mr. Laura observes that “going back to 1990 when the Dow traded around 2,750, you'll find is that the Dow reverts back to within 1% of it's [sic] opening value at least once.” That’s a shocking piece of news: stock markets go up and down. The last time I checked, stock markets had volatility before 1990 as well.

“No one can pick a perfect top or bottom but that doesn't mean you shouldn't take gains and cut losses on a regular basis.” That sounds smart, but what does it really mean? How do you know when is the right time to take gains or cut losses? All evidence says that when the typical investor tries to time the market, he or she makes less money than a buy-and-hold investor.

The rest of the article is an impassioned plea for people to become active investors because “Our financial world is rapidly changing and our global economy is becoming more and more difficult to navigate.” In reality, I think outperforming buy and hold with active investing has been getting progressively more difficult over the decades. Modern times call for more investors to abandon active investing and adopt buy and hold.

It’s easy to look back at past stock prices and imagine how much more money you would have if you bought and sold at the right times. You might even convince yourself that some of the market’s movements were predictable, but the truth is that most investors did not predict them.

4 comments:

  1. The statements "going back to 1990 when the Dow traded around 2,750", and "On May 18, 2012 the Dow closed at 12,369" would (to my untrained eye) indicate that anybody who bought and held a Dow index fund would be up 350% in 22 years... exclusive of dividends.

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  2. Why does it seem so common for people to confuse "volatile" with "predictable"?

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  3. @Spock: Good one. It's always fun to point out glaring errors in the writer's own words.

    @Patrick: I think the answer is hindsight bias. We can always look into the past knowing what happened and see how we could have made more money with teh right trades. The only remaining step is to convince ourselves that past events were inevitable and that we knew they were going to happen.

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  4. I have never seen a good argument against buy and hold and I would guess I never will. Sometimes the simplest answer is the best one.

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