Cutter Family Finances: The Argument Against the Buy and Hold Investment Strategy
By: Jeffrey Cutter, December 18, 2013
Most investors are now feeling euphoric because their buy and hold strategy has brought them back to what they had before the carnage of 2007-2008. In fact, if we go back even longer to the Tech Wreck of 2001-2002, most investors have broken even, which is great, but unfortunately, breaking even is not growth. This should be of great concern for every investor, but especially for those who are taking or must begin taking withdrawals from their investments within the next five years or so.
The buy and hold approach to investing has been coined “stagvesting.” A “stagvestor,” who follows such an investment strategy, has had no real growth for the past 12 years. The question Cutter Family Finance readers must ask themselves, is this you? Are you a stagvestor?
A buy and hold strategy is based on the premise that proper asset allocation between stocks and bonds will eventually beat the market averages. It is performed primarily by either “do it yourself” investors or brokers/advisors from financial institutions. After assets are purchased, following a formula of asset allocation (usually consisting of mutual funds), an investor just holds on to their investment choices through good times and bad since such an investor and many brokers/advisors believe that markets always come back after a decline.
Okay, what do we do? First, let go of the outdated buy and hold investing mentality.
I am not saying that you never see growth with a buy and hold strategy. What I am saying is that in our current economic environment, such an approach will not work,
Let me explain. When there is a greater supply of money, more of it is available for investing and our economy experiences growth, which it has for the last couple of years. A contracting economy, on the other hand, results when there is less money available to be invested, which is what would be happening today, unless you factor in our friends at the Federal Reserve and its policy of spending $85 billion a month, thereby increasing the supply of money in the economy.
However, even with all of the money that is being infused into our economy (and the resulting generational debt that is being created), the Fed’s policy is failing. Our economy is stagnating and is still experiencing one of the largest contractions since the Great Depression. Only those who invested in the asset classes of our economy that benefit from capital infusions, such as the stock markets, are experiencing any type of growth. If not for the Fed’s continuing policy of consistent and considerable contributions, I argue that the stock market would not be higher, there would be no euphoric wealth effect, and we would see the real state of the economy.
In other words, the economy is still very weak, and our economic contraction is not likely to stop anytime soon. Simply put, the current market direction is not proof that the United States has avoided the financial carnage that I and many others expect. The only thing it proves is that the markets are reacting to the Fed’s spending policies. When this music stops, the buy and hold investor will get hurt, but not our Cutter Family Finance readers, not today.
Let’s use some logic. Do you agree that our economy is in a state of weakness, stagnation, even with all the governmental spending? Could it be possible that the stock market is significantly overinflated from the gun-slinging monetary policies from the wizards at the Fed? So, the economy is weak and the stock market is on crack. If the economy is not getting better, or marginally better at that, what happens when it runs out of crack? What happens when the new chairman of the Federal Reserve finally stops the monetary infusion and the music stops? Yes . . . Boom!
Investors are bullish and greedy right now. They are chasing market gains because they feel like they are late to the party. But don’t forget, we have a market correction every five to six years and we are five years into a mediocre recovery. I see the same market, investor, and brokerage patterns that existed in 1999 and in 2007. The misinformed investor has a risk appetite that is just too high and is using emotion over facts and logic.
Okay, what do we do? First, let go of the outdated buy and hold investing mentality. Now is the time to pay attention, to educate yourselves, to be flexible and agile, and to be ready to run for the hills or jump on the back of any passing bulls or bears. Ask yourselves why you hold your current investments and how did they perform in down years such as 2001-02 and 2008.
Don’t let history repeat itself.
If you are in an investment position that lost in those years why are you still invested in such a way? Seek risk controlled, proactive absolute return investment strategies. Investors using these strategies sidestepped the staggering market losses during ’01-’02 and ’08, which resulted in portfolio growth in the following years. Strategies such as these tend to march to their own drummer, rather than to the rise and fall in lock-step with either stocks or bonds. These strategies are attractive to an investor who understands the facts about our current economic uncertainty and who chooses to use logic to avoid another catastrophic loss.
Decide today; don’t be a stagvestor.
Be vigilant and stay alert, because you deserve more.
Jeffrey Cutter, CPA, PFS is the managing partner from Cutter Financial Group, LLC (www.cutterfinancialgroup.com) which provides private wealth and investment management. He can be reached at email@example.com. Investment advice is offered by Horter Investment Management, LLC, a registered investment adviser.