Released: April 2, 2009
San Leandro, CA
Buy and Hold is dead. And so were most of the people who used it.
Almost all advisers and investors blithely were led into the (false) mantra of buy and hold because it was simple to do and required little thinking. Just hold on and the investment gods will always be kind and make up any losses. Advisers loved it since they just had to gather assets (marketing), do some minuscule monitoring and then charge 1% in fees for not having to do much of anything. This has gone on for decades- probably starting about 1980 once they had forgotten about the losses sustained in 1973/74 and the fact that it took over a decade to get back to normal. Admittedly, the market did have a good run starting around 1984- though the volatility of 1987 should have made the odds of just sitting there with a thumb stuck someplace very, very apparent.
But then the economic world changed. Yes, I said ‘world’ due to the impact of the personal computer and the Internet in the mid 1990s. Billions of pieces of information (notice I did not say knowledge) went streaming instantaneously into the lackluster cranium of investors and advisers to then be giddily digested and traded upon. They thought that they had a clue to the Dotcom- only to recognize that their insight and interpretation had little substance at all. They never should have bought. And when the market was decimated, they never should have held. But the mantra held firm even in view of the massive stupidity. The key people in the investment world said it was the best way to just sit there. I disagreed well before that since any reasonable evaluation of 1973/74 showed that any retiree would literally have their lives lost by simply sitting around. I taught DCA Down from the early 1990s. If the risk of investing increases, you lower your holdings of the more risky assets. As the risk increases (the inverted yield curve is an excellent guide- check out 2000 and 2006), then draw down even further. There are other substantial qualifiers that corroborate the system. DCA Down does not protect all losses but it does protect one from almost all excess and unnecessary risk.
No matter the obvious, investors and advisers then moved over to real estate and its derivatives without missing a beat. There again- no due diligence, no attention to risk, no knowledge or background - except for the perceived insight their teeny little minds could dredge up. It seems that very, very few entities- private or governmental- recognize that the fundamentals of investing have never been taught to the brokerage community. Risk has no position in any discussion. It should have been obvious that the consistent holding of bad strategies during bad economies were leading to massive losses. But so what? After all, just simply hold on and the market will return the favor with greater gains. Oh really??
No. It should have been noted by all to see that risk was always the top priority in investing. But even the heavy hitters said to stay invested. John Bogle was one. Dr. Jeremy Seigel, author of Stocks for the Long Run was another. In fact, Seigel noted in August 2007 that “If investors have cash on the sidelines, they should not wait too long to put it to use. There are good values out there in equities -- especially in financial stocks -- and you will be rewarded in the long run if you start dollar cost-averaging now.“
Well, how did that work out, bunky? Well, it worked out to losses approaching 50%. (S&P 500 is down 43%+ for one year, Midcap 49%, Small cap 45%, even the Value index is down 47%. Actually doesn’t that reduce the Value theory to gibberish???). But risk and uncertainty were going up. A myopic view of economics and/or the market can translate into terrible decisions. Why not avoid the risk and opt out- if not all at once, then at least using DCA Down.
Is this market timing? No. You are not really looking at returns- though they almost assuredly will follow risk. But risk is the whole key. Is it risk timing? Perhaps closer to the truth.
Was this risk obvious? Obviously- but it doesn’t mean anyone will pay attention. Consider that Long Term Capital with 27 PhDs and 2 Nobel Laureates should have been the wake up call to all investors, advisers and professors. But Greenspan went on to let derivatives reign supreme. The inverted yield curve- a 100% indicator of a recession- and a 1000% indicator of risk, risk, risk, was relegated to pooh pooh land by the buy and hold extraordinaires of the advising world. Larry Swedroe, a well known author and adviser- refuses to acknowledge the value. The real world disagrees since both of the past recessions were so obvious. No matter how you wish to rationalize something that ‘you do not like’, you cannot dismiss 44% losses a few years ago and next to 50% now.
The entire focus of economic and investment instruction has to change from the addled, stale and sophomoric wallowings of predated history to encompass risk as the primary focus. If not, the U.S will continue to lead the world into yet another morass. We brought the entire economic world to its knees and we have a duty to correct our ineptness.
So who is going to do it? Not a clue. Obama is telling consumers to buy stocks- yet that would be a violation of my fiduciary duty if I suggested it. (Bush was no better when he suggested stocks inside of social security). How about the SEC or FINRA- well you have Mary Shapiro who never wanted anyone to know the fundamentals of investing so I put no optimism or capability there as all. (She wrote a scathing rebuke to the introduction of fiduciary standards by brokers.) The industry- oh sure, ask Merrill, AIG, Bear Stearns. Universities- maybe but it will take a decade or two because incapacitated theories takes a long time to revise. And real world finance is tough to teach if you have never been on the streets and actually dealt with people’s lives.
We are spending billions on entities that do not know risk from a government who can’t even spell it. I have tried for decades to offer the real world elements of investing. But greed and marketing prevailed.
I don’t think much has changed and I see no way of getting solid material to the masses. So simply buckle up because we are in for a long dark ride.
Errold Moody
PhD MSFP MBA LLB BSCE CFP
Life and Disability Insurance Analyst
San Leandro, CA
Phone : 510-352-4127
Book Title : No Nonsense Finance
Courtesy FeaturesUSA.com