Financial Services Advisor Reveals the Flaw Behind "Buy and Hold" Strategy
Once upon a time, the conventional wisdom on investing was “buy and hold” - but recent events have shown the flaw in that advice, with the Dow Jones Industrial Average now worth about half what it was in October 2007, and even Warren Buffett losing money following the buy and hold strategy.
Buffett recorded record losses in 2008, his worst financial performance since taking over the investment group Berkshire Hathaway in 1965.
In fact, the Buy and Hold Strategy, or variations thereof, may have cost investors dearly over the past 18 months. Take the example of an index fund. Since portfolio decisions are typically automatic and transactions are infrequent, overall expenses tend to be lower than those of actually managed funds. Investors following this strategy are typically advised to buy an index fund that is designed to correlate with the performance of a market index like the S&P 500 and then hold it long term. Investors following this advice since October 1, 2007 would likely have seen their holdings in that fund significantly decline.
The S&P 500 closed at 1557.59 on October 1, 2007. As of the close of the business day March 17, 2009, this index was at 783.12 which represents an approximate 49.7% decline.
Buy and Hold doesn’t always work.
The riskiness of the “Buy and Hold Strategy” is exactly what has prompted Dennis Tubbergen, CEO and veteran financial services professional, to recommend that clients have an “exit strategy” in mind when investing. Exit strategies are employed to lock in a profit or prevent a significant portfolio loss by determining at what point an investment will be sold.
“I recommend to clients that they have an exit strategy when investing. Know under what circumstances you’ll liquidate an investment and make that decision prior to making the investment.”
Buying and holding an investment, particularly a stock or equity based investment can perform well in a bull market, but in a volatile market or a bear market, following such a strategy can result in portfolio losses.
“My view is that making an investment without knowing what your exit strategy will be is like getting on a cruise ship and not knowing where the lifeboats are,” Tubbergen said. “While no exit strategy works 100% of the time, I believe that a disciplined, successful investment strategy begins with utilizing exit strategies.”
Mr. Tubbergen, a Financial Services Professional for over 20 years, is CEO of USA Wealth Management, LLC, a federally registered investment advisor and is known as one of the nation’s leading advisors to financial advisors.
A nationally recognized leader in the financial industry, Dennis is a frequent keynote speaker at financial industry events.
Investing in market related securities involves a risk of principal loss. Prior to making any investment decision, the services of an appropriate professional should be sought as investment related recommendations are dependent upon the personal financial situation of each individual investor.
The S&P 500 Index is an unmanaged index that is generally considered representative of the U.S. stock market. Investors cannot invest directly in indexes. The performance of an unmanaged index is not necessarily indicative of the performance of any particular investment.
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