The "Buy and Hold" strategy of investing simply states that a diversified portfolio can't outperform the market and thus there's no need to "buy low, sell high" or monitor one's portfolio in any way other than to make sure it remains diversified (occasional rebalancing notwithstanding). Of course, one must reflect on their own financial situation and goals to make sure things like objective, risk tolerance, and time horizon haven't changed.
For individual investors, buy and hold might work great. It is managed accounts that I have in my targets currently. That is, funds that an investor places at a firm with an advisor that creates portfolios and suggests the client follow them (in my experience, almost everyone that goes into a managed account is going to accept the recommendations from the advisor).
In exchange for these "expert" recommendations, the advisor receives a management fee. Usually quoted as a yearly percent (1-2% is the general ballpark), but billed based on quarterly account values. So a 1% management fee will get taken out every 3 months as .25% of whatever the account value is on that day.
My question to the advisors is -- what are you doing to deserve that management fee? And if the answer is "buy and hold," you should be reported to your firm's ethics/compliance department. Buy and hold belongs in a no-commission brokerage account 1) because it's extremely easy to put a portfolio together and 2) requires no trading outside from occasional rebalancing. For a client that fits the buy and hold mold, a free robo-advisor is plenty.
For an advisor that charges a fee, the benchmark is "can you beat the market" (net of fees)? And if not, you get fired. So an advisor that watches the S&P 500 fall 20% in 2022 and still tells their clients "it's OK, it'll bounce back" should be fired (by their client, not their firm) and reported to ethics/compliance (for the reasons above).
"But selling when the market goes down and buying when it goes back up is market timing and no one can do that and you end up worse off than if you just stayed in the whole time." Fallacious. First, it's not market timing to see inflation is 8.5% in February, supply chains are still messed up, and Russia just invaded Ukraine and come to the conclusion that the market will react negatively for the foreseeable future. Russia invaded Ukraine on Feb 24. As an advisor, I'd have called my clients on Feb 25 and say "hey, we need to sell your portfolio by x% and move that to cash (eventually, individual bonds would become another option)." The S&P 500 would go on to close at 4384 on that day.
Second, those who call it market timing often paint it as the ability to call the exact day the market reaches it's high of the year and low of the year. There is simply no need to get it that precise. So long as the "top" is higher than the "bottom," you've produced value for your client. On Feb 25 the market closed at 4384, but the high of 2022 was actually the first trading day of the year. So the fact that I was almost 2 months late in making the call mattered? That all depends on . . .
The other half , which is deciding when to get back in. In which case I go back to the initial three causes of the bear market: inflation, supply chains, and war in Europe. Supply chains seem to have worked themselves out, yet the other two remain. I don't see any meaningful turnaround until at least one of those resolves. The S&P 500 is currently at 3839. So for now, I'm still right. But until I make the call to get back in, there's no way of knowing how the story ends.
P.S.
For those who say market timing can't work and buy and hold is superior, would you tell your client to stay in Carvana because it's bound to bounce back? Carvana stock started 2022 at $240. To see where it's currently trading, click here. That's a loss of 98%.
"But diversified portfolios . . ." Sure, first you're unlikely to see a loss of 98% in a diversified portfolio. But where's the line where you finally cut your losses? Because it shouldn't depend on whether it's a single stock or a diversified portfolio as neither can eliminate systemic risk. And second, I wonder how many advisors are doing just that, but instead of with Carvana, with crypto. Hmmm . . .
P.P.S.
I am not suggesting this is something that should be invoked frequently. On the contrary, the only times I can think of that would meet the requirements (which are almost always macro) are Feb-Apr 2020 and The Great Recession. The COVID crash would definitely be the quicker to catch given how quickly it bounced, but The Great Recession is a case very much like today. Take the collapse of Lehman Brothers as a sell point. S&P 500 closed at 1242 the first week of September. That was the week that Lehman fell apart. It would go on to reach a low of 747 that year and 667 in 2009. I use these two times solely as examples, as history is way too easy to predict.
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