For many years prior to 2008, the investment philosophy of buy and hold was promoted by major financial firms, mutual fund companies and academics who study market trends. And, for the last two or three decades the strategy worked marvelously.
Generally, since 1980, there was only one recession of significance, 1990, until the contraction which started in late 2007. Stock markets provided above average returns until the early 2000s and even “safe” investments like government bonds delivered above average results as interest rates dropped from the very high levels of 1980 to the very low levels that exist today. Corrections, when they did occur, tended to be brief and not too hard to take, at least until the bear market for technology and internet stocks, which started in 2000.
The experience of the last 18 months has people re-thinking every aspect of their money, including how much to spend and how to invest. From one perspective, we think the philosophy of buy and hold is not a terrible idea. Markets have always risen over time, despite periodic corrections that cause us a great deal of stress. The problem with not using buy and hold is that the alternative is more complicated.
The alternative to a buy and hold philosophy is to employ some sort of tactical method to time the market, moving capital between different asset classes in an attempt to avoid down markets, reducing risk and attempting to increase return. If your method to make tactical decisions is driven by emotion or subjective thinking, you are likely to fail, as have most who attempted this in the past. The problem is that this approach tends to lead us to buy high and sell low as we buy what has already risen in price because it is easy and feels good and sell assets that have declined because it doesn’t feel good.
A successful tactical plan needs to overcome the emotional aspects and force purchases of assets which are down in price and sell assets when they have been successful. I do not believe you need to try to pick the exact bottom for purchases or to sell right at the top. In fact, the distraction of trying to pick exact peaks and valleys will end up causing analysis paralysis and poor decisions usually result.
The important thing with a tactical approach to portfolio management is capturing the majority of major upward trends and avoiding the majority of downward trends. Even if you end up not increasing your return to a level above what would have been achieved through a buy and hold approach, there is value in the reduced risk achieved through the sheltering of capital during periods when your system says to sell riskier assets. In other words, the same end result with lower risk is better than full risk.
The other issue to address is just what sort of indicators or system you will use to determine points of entry and exit from various asset classes. There is no perfect system. I repeat, there is no perfect system. Remember, success in portfolio management comes from achieving a desired rate of return at an acceptable risk level. Whether that is achieved through a buy and hold strategy, or some form of tactical portfolio shifts, the end result will be the measure of success.
For those who seek to employ a tactical approach, my suggestion is to follow a simple set of rules, or perhaps subscribe to a newsletter or Internet based service that provides signals. The key word in my opinion is simple. I don’t believe day-trading or use of options is productive for most individual investors. Moving your portfolio in response to major trends, perhaps adjusting once or twice a year will be far more successful, unless you have the time and desire to sit and stare at a computer screen all day long.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.
