Financial talk

Am I Crazy?

Before you start raving that I am a lunatic for disagreeing with the sage advice given to you over the years by:

1. Financial Experts.

2. Your Financial Planner.

3. Wall Street Professionals.

4. Of course, Dear old Dad.

Please consider the following challenges with the “Buy & Hold” philosophy.

What is “Buy & Hold”?

In simple terms, the stock market often falls substantially about every 5-7 years and the stock devaluations may sometimes last 2-4 years. At that time, an investor continuing with the “Buy & Hold” philosophy would do nothing. This approach assumes that the stock market will eventually recover and it would be better to hold steady rather than try to time the selling and buying of stocks as the market recovers.

Well, I agree with half of that. Yes, the market generally does recover over time and it is difficult for the average investor to predict both the decline and the rebound in the stock market and to actually sell your stock high and buy low. However, there are significant problems with the “Buy & Hold” approach.

What is Wrong with “Buy & Hold”?

First of all, if you are trying to build real wealth for retirement utilizing the “Buy & Hold” strategy, it is usually going to take you 30-40 years because of substantial losses every down cycle that result in overall low returns. Consider this:

1. The Dow Jones Industrial Average (a blue chip stock indicator of the overall stock market) had an all time high of 11,522 as of 01/07/2000.

2. Today, over eight and one half years later, on 09/22/08 the Dow Jones closed at 11,015.

3. In between those two dates, the Dow Jones went as low as 7,702 on 9/27/02 and hit an all time high of 14,066 on 10/5/2007 with a lot of gyrations in between.

4. It would be fair to say that anyone holding a similar Dow Jones portfolio on 1/7/2000 and used the “Buy & Hold” approach over the next eight and one half years would have gone for a wild roller coaster and be left with a -4.4% loss on their portfolio.

5. Add to this the possibility that you may have had to pay taxes on dividends and capital gains if you were in a mutual fund, and this return declines further.

6. Also, in my personal experience, the same down cycles and losses apply to the Real Estate Market as well.

7. Oh and by the way, Inflation has depleted the value of your portfolio around 3% each year.

It begs the question, how can you effectively accumulate Real Wealth if you keep losing a large percentage of your principal every 5-7 years and sit idly in down markets for another 2-3 years? No wonder it takes people 30-40 years to accumulate for a decent retirement portfolio.

Another Problem.

Institutional Investments take a portion of your profits as a fee, resulting in lower returns for you.

If you are like most investors, you don’t have the time or expertise to select your own stocks and monitor them, so you would normally utilize mutual funds and variable annuities to invest for you. These institutional investments must cover their expenses:

1. An annual Management Fee.

2. Huge Fund startup Fees.

3. SEC regulation.

4. Marketing Costs.

This may all be fine in a profitable year, but when you have a losing year, you are still charged for all of these expenses (or the fund would go out of business). That’s right, fund managers can lose 20% of your money one year and still bring home a six figure income and millions for their company!

And, when you have a profitable year, the Management Fees are never capped.

By the way, if you think that investing in individual stocks eliminates these hidden expenses, consider the common million dollar CEO salaries, perks, and corporate expenses that cut into shareholder’s profits.

So, what’s the solution to help you create Real Wealth? You need to somehow achieve consistent high returns. You need to limit losing your principal. You need to diversify. And, you need to stop giving away your profits. In short, you need a Strategy that gives you much more than what “Buy & Hold” has to offer.

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Rachel Victoria, is a former CFP with an MSFS in Financial Planning. Ms. Victoria owned an American Express Financial Services Franchise for 20 years. Rachel currently enjoys researching, testing, and writing about alternative Financial Income Strategies. Please visit my website to learn more: High Yield Investments