Its Over, page-12569

..ah, one of this thread's favourite subject, the Buy and Hold mantra, which as you know I have been rather critical of.

Where I am especially critical of the Buy and Hold mantra comes down to these few points:
1. Everyone including Lance uses the indices (e.g the Dow or S&P500 or ASX200) to show the long term trajectory of the market which is basically up, but without acknowledging that these indices are calibrated or more bluntly manipulated to exclude out non-performers and include new winners, so it is a poor and misleading indication when it is not apples to apples comparison between a basket of stocks 10 years ago against a basket of stocks 10 years later.

2. Buy and Hold is not a mantra to uniformly apply across all stocks - it is more apt for good stocks only not poor ones. Try doing Buy and Hold on Dog stocks and see what you get like BUD. So hence the dangers of Buy and Hold mantra thinking to lull yourself that it is great wisdom on even poor performing stocks.

3. As Lance pointed out, Buy and Hold is great during periods of outperformance, but my point is when stocks are in highly elevated valuations position and subject to increasing mean reversion risks, Buy and Hold means you could first lose 30-50% and take years to recover. Do you know that if you lost 30% in your stock portfolio in one year, it would take a further 4 years to recover back or break even to prior to the 30% loss if you subsequently receive a 10% year on year return over those 4 years. And if you lost 50%, it would take 7 years to break even on 10% year on year returns. So the key thing is to avoid losing big. Buy and Hold would be great if you waited for when we see stock carnage. Like when CBA was trading at $25 at the depth of GFC in 2008, if you had bought then, and held to today, you would have made 4x excluding dividends over 14 years. But if you had bought 5 years ago and held till today, it barely made any mark other than dividends. So yes, timing is EVERYTHING>

4. Buy and Hold basically excludes altogether the CYCLICALITY nature of stocks - there would be periods when Gold will shine and periods when it does nothing, same with commodities, same with energy, and as proven recently even same with the almighty tech stocks. Understanding that everything is cyclical, including equities in general which is why we get bull and bear markets means that we stay more invested during the bull phase and less so during the bear phase. And we do that by recalibrating our portfolio allocation to align with the narrative of the day.

5. It does not matter when you buy the stocks if you have time- how so often we have heard that. That really depends on your need for cash. If you bought the stocks at the top and made losses and continue to make deeper losses when we go into a bear market, we could continue to hold them. Yes, provided you do not face personal circumstances when you needed the cash and require to sell them and sell them at the worse them to provide the liquidity you need e.g if you suddenly lost your job or other personal circumstances.

6. Buy and Hold has another dangerous aspect in that naive and inexperienced investors can lull into a universal mantra thinking that longer must be better in that all stocks will necessarily reach higher given enough time to mature or develop. In reality, we tend to see stocks doing their big rises during periods of exuberance , most times well ahead of their underlying fundamentals, and see them retrace when exuberance wanes and pessimism creeps in. During periods of exuberance, a stock that may have gained 200-300% may well have been valued 5 years ahead of where they are in their business development trajectory.

None of the above is financial advice, merely a representation of my personal experience, in some cases Buy and Hold works wonderfully when one has bought the right stock at the right time and had the unwavering discipline not to sell them. But more often than not, we have seen many missed opportunities to achieve optimum or excellent gains when exceptional gains were not locked in , in favour of greater hope for more gains on hope that longer must be better.  
Buy And Hold Investing: Is It A One Size Fits All Solution?
By Lance Roberts of Real Investment Advice
Saturday, May 7, 2022 8:00 AM EDT

“Buy and hold” investing. Is it truly a “one size fits all solution” to the investing conundrum? Or are there other considerations that would make such a solution less optimal?
I ask the question due to an email I received recently from one of the large Wall Street firms.
“Despite the tumble to begin this year, investors should not panic. Over the long-term course of the markets, investors who have remained patient have been rewarded. Since 1900, the average return to investors has been almost 10% annually…our advice is to remain invested, avoid making drastic movements in your portfolio, and ignore the volatility.”
As shown in the chart below, the advice given is not entirely wrong. Since 1900, the markets have averaged roughly 10% annually (including dividends). However, that figure falls to 8.08% when adjusting for inflation.
(Click on image to enlarge)

By looking at the chart above, it’s pretty evident that you should invest heavily in the market and “fughetta’ bout’ it.”
If it was only that simple.
Two Important Problems

While the average rate of return may have been 10% over the long term, the markets do not deliver 10% every year. Let’s assume an investor wants to compound their returns by 10% a year over 5 years. We can do some basic math.
(Click on image to enlarge)

After three straight years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%. Furthermore, it then requires a 30% return to regain the average rate of return required.
There is a significant difference between AVERAGE and ACTUAL returns. The impact of losses destroys the annualized “compounding” effect of money.
To prove that, the purple shaded area shows the “average” return of 7% annually. However, the differential between the promised and “actual return” is the return gap. See the problem?
(Click on image to enlarge)

The differential between what investors were promised (and a critical flaw in financial planning) and actual returns are substantial over the long term.
Secondly, and most importantly, you DIED long before you realized the long-term average rate of return.
The chart box below shows a $1000 investment for various starting periods. The total return holding period is from 35-years until death using actuarial tables. There are no withdrawals. The “promise” of 6% annualized compound returns is the orange sloping line. The black line represents what occurred. The bottom bar chart shows the surplus, or shortfall, of the 6% annualized return goal.
(Click on image to enlarge)

At the point of death, the invested capital is short of the promised goal in every case except the current cycle starting in 2009. However, that cycle is yet to be complete, and the next significant downturn will likely reverse most, in not all, of those gains.
The Problem With Long-Term

Such is why using “compounded” or “average” rates of return in financial planning often leads to disappointment.
Let’s consider the following facts in regards to the average American. The national average wage index for 2020 is $55,628.60, lower than the $62,000 needed to maintain a family of four today.

• 61% of consumers are living paycheck-to-paycheck
• 42% of consumers earning more than $100,000 struggle to make ends meet.
• 56% of Americans can’t cover a $1000 emergency with savings
• 50% of American households have NO retirement savings

Assuming that the average retired couple will need $40,000 a year to live through their “golden years,” they will need roughly $1 million, generating 4% a year in income. Since approximately 90% of Americans have saved less than one to two years of annual income, funding retirement could be problematic.
While many suggest the “buy and hold” investing will work over the long term, for most, that period is roughly 15-20 years until retirement.
Here is the problem.
There are periods in history where returns over 10-year periods were negative.
(Click on image to enlarge)

The return has everything with valuations and whether multiples are expanding or contracting. As shown in the chart above, real rates of return rise when valuations expand from low to high levels. But, real rates of return fall sharply when valuations have historically exceeded 23x trailing earnings and revert to their long-term mean.
Yes, “buy and hold” investing will work, but it depends on WHEN you start your investing journey. At 35x CAPE, such suggests that returns over the next 10-20 years could be disappointing.
(Click on image to enlarge)

Timing Is Everything

The MAJORITY of the returns from investing came in just 5 of the 9-major market cycles since 1871. Every other period yielded a return that lost out to inflation during that time frame.
(Click on image to enlarge)

With this in mind, this is where the email went awry with selective data mining:
“Among the key findings: On average, participants who kept contributing to their retirement plans throughout the 18-month period (October 2008–March 2010) had higher account balances than those who stopped contributing; Participants who maintained a portion of their retirement plan asset in equities throughout the entire period ended up with higher account balances than those who reduced their equity exposure amid the peak period of market distress.
(Click on image to enlarge)

Thus, retirement investors who kept contributing to their plan and who maintained some exposure to equities throughout the period were better off throughout the market’s 18-month bust-boom period than those who moved in and out of the market in an attempt to avoid losses.”
The main problem is selecting the start and ending period of October 2008 through March 2010. As you can see, the PEAK of the financial market occurred a full year earlier, in October 2007. Picking a data point nearly 3/4ths of the way through the financial crisis is egregious.
It took investors almost SEVEN years to get “back to even ” on an “inflation-adjusted basis.”
Every successful investor in history, from Benjamin Graham to Warren Buffett, has particular investing rules that they follow. Yet Wall Street tells investors they can NOT successfully manage their own money, and “buy and hold” investing is the only solution.
Why is that?
More importantly, if it worked as stated, why are 80% of Americans broke instead of rich?

Buy And Hold Works, Until It Doesn’t.

“buy and hold” investing works well during strongly trending market advances. Given enough time, the strategy will endure the eventual market downturn. However, three key considerations must get considered when endeavoring into such a strategy.

1. Time horizon (retirement age less starting age.)
2. Valuations at the beginning of the investment period.
3. Rate of return required to achieve investment goals.

Suppose valuations are high at the beginning of the investment journey. If the time horizon is too short or the required rate of return is too high, the outcome of a “buy and hold” strategy will most likely disappoint expectations.
Mean reverting events expose the fallacies of “buy-and-hold” investment strategies. The “stock market” is NOT the same as a “high yield savings account,” and losses devastate retirement plans. (Ask any “boomer” who went through the dot.com crash or the financial crisis.”
Therefore, during periods of excessively high valuations, investors should consider opting for more “active” strategies with the goal of capital preservation.
Important Points To Consider

Before engaging in a “buy and hold” investment strategy, the analysis reveals essential points to consider:

• Investors should downwardly adjust expectations for future returns and withdrawal rates due to current valuation levels.
• The potential for front-loaded returns in the future is unlikely.
• Your life expectancy plays a huge role in future outcomes.
• Investors must consider the impact of taxation, inflation, and current savings rates.
• In a world where markets are highly correlated, MPT is likely not effective in portfolio allocation strategies.
• Drawdowns from portfolios during declining market environments accelerate principal destruction. During up years, plans should be made to “safe harbor” capital for reduced portfolio withdrawals during adverse market conditions.
• Over the last 12-years, the yield chase and the low rate environment have created a hazardous environment for investors. Investment strategies should accommodate for rising volatility and lower returns.
• Investors MUST dismiss expectations for compounded annual return rates in place of variable rates of return based on current valuation levels.

There is no “one best way to invest.”
Every investor must account for the myriad of variables that will impact their investment returns and financial goals over time. Most importantly, investors must realize that surviving the eventual bear market is more important than chasing the bull market.
The “best way to invest” is navigating the entire market cycle between when you start investing and when you need your capital.
“Buy and hold” strategies are the “best way” to invest until they aren’t.
Just make sure you know where you are within a given market cycle to increase your odds of success.