Myth buster: Does “buy and hope” work?

2009-01-21, Wednesday

You might want to point out a typo in the title. It should be “buy and hold”, which is the propaganda of the wall street so-called experts. After all, we SHOULD all save for retirement, invest for the long term, don’t try to time the market. Dollar cost average is the best way to participate in the market. The history is on our side. Of all the asset classes, stock consistently outperformed. Hundreds of years of history tell us that stock consistently delivers annualized gain 8% (ratcheted down to 6% lately?).

 

Sounds familiar? Because it is the standard advice you will get across the spectrum, no matter where you turn for advice, be it TV, radio or Certified Financial Planner.

 

Remember the standard disclaimer: past performance is no guarantee for the future. Guess what? All the experts has vested interest in the management fee generated from your “buy and hold” accounts. To be fair, they also care about your performance, relative performance, that is. If market down 40%, your fund is ONLY down 38%, that means our smart fund manager out performed S&P 500 by 2 percentage point, and his/her job and year-end bonus is secured this year. You see? Fund manager’s goal is not necessary aligned with your goal. You need to be careful whom you take the advice from.

 

With the bull market we have experienced over the last 2 decades, every dip (even scary at times, like 87 crash, 98 LTCM debacle, ’00 dot com bust) prove to be a wonderful buying opportunities. Little wonder that “buy and hold” turns to gold standard. You just need to buy low and HOPE the market will eventually come back to make you whole and make you retire comfortably. So, buy and hold on to your HOPE.

 

To that, I will have to say it is true only until it stop working for you, like the current market we are in now. The gold standard of “buy and hold” in bull market can turn to disaster in bear market, wrecking havoc in your portfolio. Be careful what you are holding, it could be a big bag no one wants.