Episode 54: B&H: Perceived Flaws

There are a few criticisms of investing using a Buy and Hold strategy. Some are legitimate. Some, much less so. With claims that Buy and Hold is too easy, too unsophisticated, too stressful, and is obsolete in today’s investment world. A look at these perceived disadvantages of Buy and Hold investing.

All that and more in Episode 54 on the Wilson Wealth Management YouTube channel.

“Buy and Hold is an easy investment strategy. Is it too easy for investors?”

Yes, Buy and Hold is quite easy. But ease does not mean it is ineffective.

The bigger issue is that the ease of this approach can create lazy investors. That is a legitimate concern.

Investors must remember that it is Buy and Hold, not Buy and Forget. Investors still must monitor their portfolios and holdings. As conditions change, maybe investments need to be fine-tuned. Back to the target asset allocation. When the product is no longer best in class. When your Investor Profile changes and you need to amend the target asset allocation.

“Investing success requires sophisticated traded systems. Can Buy and Hold work in a complex world?”

Yes, there are many complex trading strategies available. They require expertise and time. Often with higher costs to implement as complex strategies tend to be quite active.

The reality is that sophisticated approaches usually do not outperform a simple strategy. Read investing advice from people like Warren Buffett or John Bogle. A simple approach is often the best one.

“You stated Buy and Hold helps manage emotions. But I read it is actually stressful. Which is correct?”

Yes, an advantage of Buy and Hold is that it promotes investor consistency and discipline. Which helps manage emotions.

For some investors though, that discipline can be a two-edged sword. When the markets are falling and the experts are predicting more doom and gloom, it can be hard to stay on track and hold onto your investments.

And if you are invested in non-diversified assets, it can be stressful. But in our overall investment approach, you should combine Buy and Hold with Dollar Cost Averaging as you build a portfolio of well-diversified, low-cost, index funds.

Under this approach, in down markets you will be buying additional shares at discounts and smoothing your cost base. As the assets are well-diversified, you do not need to worry about owning the next Enron or Kodak. That stock specific risk is not an issue. Less of a stressor adding quality assets at price discounts.

You understand investing principles. The risk-return relationship. How actively trading and trying to time market volatility tends not to be successful. That in the long-term, assets increase in value, even if there are corrections and dips along the way. In buying the entire market, you understand you will be fine over time in holding your assets.

The entire investment approach and your new knowledge will serve to alleviate the stress in rocky times.

“I read Buy and Hold had its moments. But in today’s computerized world, it is obsolete. Yes or no?”

Yes, there are better tools and access to information now. Many investors use technical analysis and software programs to actively trade and take advantage of short-term price inefficiencies. Investors have better access to corporate information and use fast trading platforms. A short-term trading approach is much easier and effective than 10-20 years ago.

But does that mean Buy and Hold is obsolete? Does it have to be an either/or prospect?

I would say no. As I have discussed previously, I do not think that technical analysis and very active trading does bring investment success for most investors. Especially those reading this post. If you want to develop expertise in technical analysis and become a full-time trader, that is one thing. If you are a doctor, teacher, engineer, lawyer, you work a full-day in your own area of expertise. Can you compete part-time against these investing professionals?

To read a little more on these not-so-legitimate criticisms, please refer to “Buy and Hold: Perceived Disadvantages”.