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Sunday, February 16, 2014

Is "Buy-and-Hold Dead"?

Is "Buy-and-Hold" in Here?
I quite often hear the phrase "buy-and-hold is dead."  In fact, two years ago a money manager stood in front of the American Association of Individual Investors in Baltimore and proclaimed the demise of buy and hold.  He was promoting tactical allocation, of which he is a practitioner and would be glad to tactically allocate your assets for 1.50% of your assets annually.  Perhaps not as remembered by some in the group, there was a member who pressed the speaker on his current allocation.  He responded that his tactical allocation indicators had him heavily into cash.

Given how adamant he was about his style and the hindsight we now have for the past 2 years, I often wondered how he did.

It is hard to get performance data on specific managers, for good reason:  managing for individuals presents unique cases in every instance.  For example, some clients come in with load funds and stocks that have large capital gains, etc., requiring careful management from a tax efficiency perspective.  As a result, it is not easy to tell if a given money manager is doing a good job.  Furthermore, you can't ask clients because many clients don't know.  I've had people tell me their investment manager did great last year because he made them $18,000.  Think about that for a moment.  It actually tells you nothing.

I follow up by asking what their return was.  Typically, they have no idea.  At that point, it is useless to go the next step and ask about risk.

So it is difficult to assess how investment managers perform.

But what do we know?  We know that a well-diversified, low-cost indexed portfolio achieved a return of approximately 8%/year over the past 20 years - a rate that doubles your money every 9 years and, therefore, more than quadruples assets over two decades.  We know it achieved this performance over a period that was extremely difficult at times.

We also know that Warren Buffett, the most successful investor of our era,  is a proponent of buy-and-hold.

Here are some further thoughts on buy-and-hold:


The bottom line is each investor has to decide on their own whether active trading, tactical allocation, market timing or buy-and-hold is the way to go .

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