Based on consistent results I think Buy & Hold should be renamed Buy, Hold & Bye Bye. It sounded great for a while, especially for the huge majority of investors who don't have the time or interest in really doing due diligence on investments.
Investing, for some, might be just a hobby, but it can sure be an expensive one. Yet, if you're like many of us, you know there are opportunities for putting your money to work and having it grow. Nonetheless, investing, like any business (and it is a business) has its own unique challenges. Here are what I consider to be the top three.
1. Intelligently Deciding What to Buy
When it comes to Mutual Funds, there are today over 13,000 choices. You're going to check out each one, right? Yeah, right. And even for those you do check out, what are you going to look at? Past performance. What else can you look at? But as it says on the bottom of every prospectus, past performance is no guarantee of future results. And in these days of cockeyed cooked books, past performance is barely a guarantee of past results! So you need to decide not only what to buy, but you have to be darn sure you know when to sell it when future results of an investment don't match your expectations.
Sure, there are investment rating services that provide a false sense of security to Buy & Holders. But the fact is that pretty much every investment that rating services have touted over the last few years has lost money. So much for depending on that sort of expert advice.
2. Determining When to Buy?
It shouldn't matter when you buy if you're never going to sell—but it does. If you buy just before the market falls, guess what: You will start with a loss that you have to recover before your investment begins making money. So what? According to statistics on mutual fund sales, most investors buy just in time to grab a loss.
Buy & Hold may turn out to be a profitable approach if you intend to hold forever. But we don't live forever, and most people are going to want to sell their investments at some point before forever hits. It's small comfort to know that if you hold your investments for another 20 years, they will make money—especially if you're retired and want to take a cruise next month.
3. Staying the Course.
It takes a strong stomach to hang on to an investment when you see it disappearing before your very eyes. Or even when it's up one day and down the next. (Like these days, for example.) And once you decide that having to wait for three decades before your investment gets back to square one is not such a great deal, what happens to your Buy & Hold strategy then? It's out the window and all you're holding is the bag. The much emptier bag.
So what's an investor to do, especially an investor who's really not a professional? For one thing, find a reliable method of gaining information. One that I like is a trend analysis approach that objectifies market behavior. This type of approach is more kinetic in that it doesn't rely on past performance—it relies on past and present performance to indicate a "trend" toward future performance. While that's not infallible in any sense of the word, it is a broader range of information than most guides.
Using one of those as a foundation for your strategy, determine a buy point and, most importantly, a sell point for any investment you make. Get comfortable with taking small losses before they turn into big disasters.
There is always risk in investing. However there are ways to minimize risk so you become an investor, not merely a gambler with high hopes for a Buy & Hold approach that many people have now found to have failed them.
Your Worst Enemy to Successful Investing
How do you make your investment decisions and where do you get your information? If you're like most of the people I know, you look to the experts.
That's fine, however it's important to be aware that for every expert, there's an opinion and for every opinion there's an expert. I have a friend who says that opinions are like noses: everyone has one but you wouldn't live in anyone else's nose!
Around the first of the year, along with the New Year's resolutions, come the New Year predictions for what will be hot and what will not. As if that isn't enough to produce a massive case of information indigestion, now we have the cable financial shows with pretty much the opinion of the hour.
What this is producing is a frenzy of buy and sell activity for stocks in general, and now for mutual funds as well. I don't think this approach serves either the investors in particular or the funds in general.
The big problem with this for mutual fund investors is that all the experts are recommending different funds. It might be one thing if experts had a solid basis for their perspective. If they did, then you would think their recommendations would line up and they'd all be touting the same thing.
But they don't and they aren't. Oh sure, each one of them can make a good case for their pick. But so can the next "expert." And usually both of them won't be right (if either of them is). So, where's the value in this for you? Beats me.
Another problem with this approach is that many experts recommend different funds at different times, and, in an effort to be in the hot fund, investors keep moving from fund to fund.
In the same breath, the experts are telling us to invest for the long term. Well, I can't figure out how to do both: be in the latest hot fund, and hold what I've got for the long haul.
The downside of all of this for the funds is that sometimes a fund touted as the hot one to be in attracts so much investment attention (i.e., money) that it grows beyond its original intention. At that point, it loses its direction and the very thing that made it strong is sacrificed. And guess what happens to the performance?
So, in the midst of all the hawking and hype for this fund or that, what's an investor to do to make intelligent choices?
For myself and my clients I use a trend tracking methodology, which identifies long-term trends in various markets. I research funds for stability and reliability as well as current performance. Then, when our trend indicator signals a Buy, we select our mutual funds based on momentum figures for various time periods to arrive at the most promising fund(s) to use for this cycle.
This gives us a head start and sometimes, weeks after we've bought a fund, I see it written up in financial papers as being one of the best performers.
Does this approach always put us in the number one fund? Maybe not. But we are almost always in funds that are doing very, very well. And do we get in at the bottom and out at the very top? Again, maybe not.
However, I can tell you that, using this methodology, my clients and I followed the sell signal we got in October, 2000, and were safely invested in solid money markets when the stock market crashed and burned.
Is this approach for you? It depends on how much adrenaline rush you like when you watch your investments. Personally, I fulfill my thrill quotient with other things in life and enjoy sleeping at night when it comes to my investments.
How to Pay Less and get More
How do you invest? What do you really pay? At the end of the day, what are your real results? These are questions smart investors should be asking themselves (but usually don't). In this era of more fees, misc. charges, holding periods and back end redemptions, even at discount brokers, how are you really making out?
Working with a new client brought this all to my attention. I know what I found may not apply to everyone; however it will apply to many and very likely apply to you.
I need to preface this by saying that, unlike the majority of registered investment advisors, I have built my practice over the past 15 years by dealing with "small" investors. Many of them are first timers because my minimum account size is only $5,000.
I targeted this group because I enjoy the educational part of my business. A happy side benefit has been that by providing million dollar service to these so called "small" investors, they naturally refer me to parents, relatives, friends and business associates, often with considerably more assets than the original client. What a happy consequence.
Having set the stage, here's what happened with my new client who we will call John. John was 26, newly married with a one year old son. His wife was taking care of the child and John had a good full time job. After selling his house in California and moving to Florida he had $6,000 left for starting a long-term investment program.
Though he had been reading my newsletter for about a year, John decided to manage his 401k on his own. It was a noble effort but provided less than desirable results.
He then attempted to set up a brokerage account at a major discount broker. With his $6,000 he was told that the quarterly fee would be $45, and, of course, if he sold any mutual fund within the first 180 days, there would be an early redemption fee.
$45 per quarter would be equal to an annual fee of 3% of his starting balance. John called me somewhat frustrated and said that he'd be willing to set up an account with me, but how would it make sense if in addition he'd have to pay my advisory management fee?
That was a good question because it certainly doesn't make sense to have an account in any type of market environment and pay about 6% in fixed annual fees.
However, what John didn't know was that if you have an account with a registered investment advisor who is affiliated with custodial broker, the fee structure changes.
What did that mean to him? It meant that I opened the account for him as a new client. He now has no annual fees, other than my management fee, and his 180 day holding period for mutual funds is reduced to 90 days, minimizing, if not eliminating, the likelihood of an early redemption fee.
The net result was that he would receive the benefit of my experience—which he already trusted based on my track record of pulling clients out of the market in October 2000—and it would cost him no more, and likely less, than his discount brokerage account.
Needless to say, John was very relieved. In essence, he traded broker garbage fees for professional management at no additional cost to him.
And, since he itemizes his deductions on his tax return, all fees paid are tax deductible, which is just an added bonus to factor into the equation.
It turned out to be an all around win-win situation for John. I encourage you to review your situation and see if what looks like a discount in fees is actually costing you a premium.
