MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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The Demise of Buy and Hold
By Ulli G. Niemann
Based on consistent results I think Buy & Hold should
be renamed Buy, Hold & Bye Bye. It sounded great for
a while, especially for the huge majority of investors who
don't have the time or interest in really doing due diligence
Investing, for some, might be just a hobby, but it can sure
be an expensive one. Yet, if you're like many of us, you
know there are opportunities for putting your money to work
and having it grow. Nonetheless, investing, like any business
(and it is a business) has its own unique challenges.
Here are what I consider to be the top three.
1. Intelligently Deciding What to Buy
When it comes to Mutual Funds, there are today over 13,000
choices. You're going to check out each one, right? Yeah,
right. And even for those you do check out, what are you
going to look at? Past performance. What else can you look
at? But as it says on the bottom of every prospectus, past
performance is no guarantee of future results. And in these
days of cockeyed cooked books, past performance is barely
a guarantee of past results! So you need to decide
not only what to buy, but you have to be darn sure you know
when to sell it when future results of an investment don't
match your expectations.
Sure, there are investment rating services that provide
a false sense of security to Buy & Holders. But the fact
is that pretty much every investment that rating services
have touted over the last few years has lost money. So much
for depending on that sort of expert advice.
2. Determining When to Buy?
It shouldn't matter when you buy if you're never going to
sell-but it does. If you buy just before the market falls,
guess what: You will start with a loss that you have to recover
before your investment begins making money. So what? According
to statistics on mutual fund sales, most investors buy just
in time to grab a loss.
Buy & Hold may turn out to be a profitable approach
if you intend to hold forever. But we don't live forever,
and most people are going to want to sell their investments
at some point before forever hits. It's small comfort to
know that if you hold your investments for another 20 years,
they will make money-especially if you're retired and want
to take a cruise next month.
3. Staying the Course.
It takes a strong stomach to hang on to an investment when
you see it disappearing before your very eyes. Or even when
it's up one day and down the next. (Like these days, for
example.) And once you decide that having to wait for three
decades before your investment gets back to square one is
not such a great deal, what happens to your Buy & Hold
strategy then? It's out the window and all you're holding
is the bag. The much emptier bag.
So what's an investor to do, especially an investor who's
really not a professional? For one thing, find a reliable
method of gaining information. One that I like is a trend
analysis approach that objectifies market behavior. This
type of approach is more kinetic in that it doesn't rely
on past performance-it relies on past and present performance
to indicate a "trend" toward future performance.
While that's not infallible in any sense of the word, it
is a broader range of information than most guides.
Using one of those as a foundation for your strategy, determine
a buy point and, most importantly, a sell point for any investment
you make. Get comfortable with taking small losses before
they turn into big disasters.
There is always risk in investing. However there are ways
to minimize risk so you become an investor, not merely a
gambler with high hopes for a Buy & Hold approach that
many people have now found to have failed them.
© Ulli G. Niemann