There are valid criticisms when using a Buy and Hold investment strategy. Potentially sub-optimal returns. No bear-market protection. Possible need for a very long time horizon. A review of these legitimate concerns when using Buy and Hold.
All that and more in Episode 55 on the Wilson Wealth Management YouTube channel.
“If Buy and Hold does not allow for maximum returns, why use it?”
An argument in favor of active management. If you are agile and a strong asset selector, you can improve upon performance over a hold approach.
However, as we have seen over and over again, active management tends not to outperform a passive approach. On a consistent basis over longer periods. We covered this in “Episode 36: Passive versus Active Management Data”.
“Buy and Hold does not provide down-market protection. Should I market time?”
The same issue holds with down-market protection.
Yes, in a Buy and Hold you sit tight through down markets. Maybe you experience unrealized losses. Some fairly significant. Also, there is the stress of watching your net worth fall, while you do nothing.
But, as we saw with active management, getting the market timing right is not easy. If it was, the professional investors would jump out and back in after the fall on a consistent basis. And easily beat their benchmark returns. They do not.
Part of the problem is identifying when a market will move. As we discussed in “Episode 38: Investor Behaviour”, simply missing out on the best 5 or 30 out of 13,870 market days can decrease portfolio growth by 35% and 81% respectively.
It is usually better to remain invested and not miss out, than get the timing wrong.
“What if I am not immortal and cannot wait forever for Buy and Hold to succeed?”
In the long run, assets appreciate. In the shorter term, there may be market volatility. Assets do not steadily climb in value.
The question is, how long must you wait to see that growth. Especially when enduring a substantial and/or lengthy correction. That is a risk.
This comes back to diversification and risk-return relationship. Then matching investments to specific financial goals.
If you have a 40 year time horizon until retirement, you can take on added investment risk (i.e., volatility). Over time, the price swings will even out and you should receive higher returns for the extra risk.
If you have 2 years to save for a home down-payment, you cannot take on that extra volatility. You do not have the time frame to allow for price swings (in both directions) to average out. Instead, you sacrifice return for certainty and safety.
By matching investment risk-return profiles to the time horizon of a specific objective, you can eliminate some of the concerns from market volatility and bear markets.
We saw this in the graph from “Why Use Lump Sum Investing?”. Over time, assets appreciate. Over time, the riskier assets appreciate more than the less risky asset classes. But throughout the time frame, in short to medium terms, there is greater price volatility in the higher risk classes.
We also saw this in “Episode 5: Standard Deviation”. Where we view volatility from a quantitative perspective. The higher the investment risk, the more likely the actual outcome will differ from the expected result. What you choose to invest in will dictate how volatile the asset will be.
To read a little more on this topic, please refer to “Buy and Hold: Legitimate Concerns”.
