Buy and Hold - bet you have heard about that financial strategy at one point or another. The older you are the more likely you have heard it and probably the worse off you are today. When the markets go down, like we have seen over the last few years (forget about the rebound of late) your portfolio seems to go down harder. Why does it seem that your portfolio can fall 50 percent or more over night but you can’t seem to get it to move higher at the same rate? Great question!
If you are plugged into the financial news of the day, you know that we just had the best July in the markets since 1997. I say “whatever.” I know one too many investors that don’t agree with that. Buy and hold as a strategy has been around a long time, I mean since the beginning of trading. Gone are the days when you could buy a good blue chip like the IBM of late, sit on it year after year and receive a safe double digit return without ever having to look at your stock.
The problem with “buy and hold” as a trading strategy is that it is like any other great way to make money; the first one in makes all the money. If you get in at the bottom and you start your buy and hold plan, odds are you will make money in the long run. However, at some point the market will retrace its moves and then give back your gains, some or all of them. Then if you get into a reversal for a prolonged period of time, which is what we saw when the markets went down significantly to the levels it is currently holding, you may not have enough time to recover.
For those of you that get in at higher points, you then get caught up in great so called strategies like cost average down. You start allowing your emotions to take over as you ride the stock all the way down. You feel like it’s a great company and are sure it can’t go any lower…it will come back…I have a feeling about this! Any of these sound familiar? You bet! How did that feeling work out for you? Probably not too well. All you did was build a portfolio that has a lot of a stock that you cost averaged down and that is still a long way from break even.
Don’t email me and say it’s not a loss until you book it on paper. Are you kidding me!? I have heard this one time too many. It’s a loss, oh believe me it’s a loss. Try paying a bill or retiring on a stock that is down 80% or more in your portfolio. You can’t because it’s a loss. Let’s try this concept on for a moment- Time Value of money.
Time Value of money is something we must take into account, especially those of us that are already in retirement or nearing that very important point in our financial lives. If you are sitting in a stock that has done well with your “buy and hold” mentality then great! Now do something to protect your profits. Try using a stop loss order, which will allow you to set a price that if (or when) the stock drops to will get you out of the market. If you love the stock so much, buy it back when it bottoms out in order to protect the profit. You can’t book the profits until you sell the stock. Why be up 40 percent on your favorite stock, and then watch it retrace its profits to break even or worse, wind up with a loss. You can sell at the 40 percent profit and buy it back if you love it so much when it gets back to your original price. While it is going down you can put your money in something that is doing well. Thus, the Time Value of money.
If you aren’t making at least 3 to 5 percent on your money, you are losing out to inflation. You better be planning on bumping that return on investment higher as inflation is surely on the rise. So you sit in your favorite stock and if you are lucky enough to make 5 percent a year and you feel happy. But inflation is running higher than 5 percent. Guess what? You are losing money more than you think, and your retirement will not be what you had hoped for, if at all.
It is okay to let someone manage your money for you, but you had better know a little about what they are doing for you so you don’t wake up one day and wonder how your portfolio is doing and where all the money went. All I am saying is take a little time to learn about the markets and learn how to use some of the tools out there to help you do that.
No reason anymore to sit in a stock that is about to go down or that is going down when you can be in one that is moving forward. With a little education and support, you can take control of your financial future. Add a little diversification and money management and there is no stopping you.
Happy Investing,
James Dicks
