Beyond Buy-and-Hold #76
By Rob Bennett
Buy-and-Hold doesn?t work. Look around. it?s obvious.
But wait! The Buy-and-Holders have an explanation.
It?s the Economy! Buy-and-Hold is aces. It?s that darnned economy that is messing everything up. Buy-and-Hold cannot be expected to produce good results in the face of such a bad economy.
Trying to have it both ways
Please think over what is being said here. When Buy-and-Hold produces good results, we credit the investing strategy. When the results are poor, we place the blame elsewhere. As Church Lady might observe, ?How convenient for the advocates of Buy-and-Hold!? It?s a ?heads I win, tails you lose? approach to investing analysis.
And you know what? This isn?t the first time the Buy-and-Hold advocates have played this little trick on us.
This is the fourth time in U.S. history that The Stock-Selling Industry has been successful in persuading a large percentage of investors to follow a Buy-and-Hold strategy. The first time, Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn?t see acceptable stock returns for another 20 years.
The second time, Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn?t see acceptable stock returns for another 20 years. The third time, Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn?t see acceptable stock returns for another 20 years.
The fourth time (this time), Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn?t see acceptable stock returns for another 12 years (and counting).
Are you beginning to see a pattern?
There is a reason why it always plays out the same way. Economic crises always ruin the Buy-and-Hold game because the Buy-and-Hold game always causes an economic crisis. To say that ?Buy-and-Hold isn?t working because of the economic crisis? is to say ?Buy-and-Hold isn?t working because of what Buy-and-Hold is.
Buy-and-Hold is the investing strategy that says that stocks are worth buying at any price, that it is okay to stay at the same stock allocation no matter how high prices go. That can never, ever, ever work in the long term. It is a logical impossibility.
We often refer to stocks as ?risky? without stopping to think about the nature of that risk. The risk is that stocks might some day become so high-priced as to provide poor long-term returns. Stocks never perform poorly when they are low-priced or fairly priced, stocks always perform poorly when they are high-priced. So the proper way to say it is to say that high-priced stocks are risky.
Stock prices are set by investors. If we all were concerned about our retirements, we could pump stock prices up to 10 times what they are today over the course of the next six months. Why don?t we do just that?
We don?t do it because our common sense tells us that it is a silly and dangerous game. Whenever we cause stock prices to increase more than the 6.5 percent gain justified by each year?s economic growth, we are borrowing the extra returns from future years, pumping up our returns in the now in exchange for poor returns a few years down the road. What?s the point?
Do you remember the ?New Paradigm? in the economy and the stock market?
Common sense tells us not to play stupid games with our retirement money. Buy-and-Hold encourages us to play such games. Hey! Maybe this will be the first time in history when overpriced stocks provide good long-term returns! No one has a crystal ball. No one can say for certain.
The Buy-and-Holders encouraged us to play this game to the hilt in the 1990s, to pump and pump and pump stock prices and never to apply the brakes by lowering our stock allocations when risk got out of hand. When millions of investors agree to take on far more risk than they could handle, an economic crisis follows. And the Buy-and-Hold advocates then blame the economic crisis for their strategy failing once again.
It?s a dishonest game. It has hurt millions of people in very serious ways. I want no part of it. I am working hard to earn a reputation as the most severe critic of Buy-and-Hold alive on Planet Earth today.
If you are feeling the pain of this economic crisis, or if you know of others who are, I hope you will place the blame where it belongs. It is The Stock-Selling Industry and its reckless and relentless promotion of Buy-and-Hold investing strategies that brought on this crisis.
There?s nothing wrong with our economy. We should be grateful that our economy was strong enough to survive for a good number of years in the face of the relentless promotion of Buy-and-Hold strategies. We should all be doing whatever we can to bring our wonderful economy back to life. By making sure that Buy-and-Hold dies and is never permitted to come to life again.
Rob Bennett has identified the 23 most common and most costly investing mistakes. His bio is here.
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