Volume 90 No. 6 - June 2019
It’s hard to wait. As children, this is one of the earliest life lessons we learn. Waiting gets no easier as we go through life. We have all been told by others, “Don’t just stand there. Do something”. Much to the contrary! Adopting a buy-and-hold strategy has proven to be a wise choice for many investors, and often results in better returns than an actively traded portfolio.
Often, the hardest thing to do in investing is to do nothing at all. But, it may be worth the effort. Sometimes, the best thing to do is to stand our ground, instead of making an investment decision we will regret later.
Ask What Your Money Can Do for You
Investment Counsel very much embraces a buy-and-hold strategy. We would argue that this long-term approach to investing makes your money work for you, instead of you for your money.
Massachusetts-based Dalbar, which produces the nation’s leading study of investor behavior, found that equity investors underperformed the S&P by more than 5% in 2018. Why? Their chief marketing officer explained that investors generally pulled out of markets too late to avoid downside volatility and did not return soon enough to fully take part during recovery periods. Basically, investors did not buy and hold – and they had trouble timing the market.
Stand Your Ground
What spooked investors in 2018? The trade war threat, an aging bull market, and a government shutdown combined with other worries of the day to shake investor confidence last year. As a result, the S&P closed the year at the disappointing ˜2500 level, down some 14% from all-time high territory last September. The press rolled out its library of coming bear market articles and investors took cover. However, it is worth noting that, even looking retrospectively from that point in time, the year-end 2500-point close still bested the index’s 2017 open by 11% and its 2016 open by over 20%.
Your Money: “After Taxes”
While buying and holding often beats an active trading investment strategy, we should also consider the impact of taxes. Capital gains taxes eat away at profits only after you sell stocks. Until you sell them, you have those returns, compounding tax-free, or more accurately, on a tax-deferred basis. Assuming that someday, perhaps post-retirement, you drop to a lower income tax bracket, you may end up paying less in taxes if you sell at that point, rather than at mid-career when your salary-based compensation is likely to be higher.
Staying Smarter Than Other Investors
When you trade actively, you are essentially trying to beat the market and the other investors who form the market. Even when you remove the biases that Dalbar raised, i.e., that investors hold onto their securities too long in a downturn and come back too late in a recovery, you still have to find buyers for the securities that you exit. When you sell these securities at deflated or deflating prices, you are betting that they will sink lower, while the buyer is assuming the opposite – that they will recover. It’s a zero-sum game, and someone will be wrong. By making the sale, you are betting that you are smarter than the other investor – either because you better predict the future or because you have a better understanding of the underlying company’s characteristics and how they might drive future stock price movements. This isn’t always the case.
Why Long-Term Buy-And-Hold Strategies Produce Results for so Many
It’s human nature to want to run whole-heartedly into bull markets and to run fleeing from bear markets. The emotion long predates equity markets and probably civilization in general. We are hard-wired to do it. In most cases, though, bravery and cooler heads prevail.
Investing is hard, and trying to time when to get out of a ‘bad’ market and when to return to a ‘good’ market does not make it any easier. When you buy-and-hold, you no longer have to perfectly time when to buy or when to sell a particular security – and you no longer have so much relying on your ability to do so. News related to one particular security can hit the market and influence investors very quickly; however, long-term buy-and-hold strategies allow the market to recover and the company’s underlying fundamentals to determine the true value of its equity.
How to Buy and Hold
While agreeing on a buy-and-hold strategy is one thing, implementing it opens up other questions. How do you start? First, there’s asset allocation. While we’ve mostly discussed stocks in this article, as an investor, you may also want to consider allocating part of your portfolio to bonds. Ask us at Investment Counsel and we’ll be happy to help you find the asset allocation best suited to your investment needs, goals, and timeline.
Second, in a buy-and-hold strategy: buy, then hold. That means not checking and adjusting your portfolio every day or week based on the news that has hit your TV, laptop, or smartphone screen. It is wise to check in on your investments periodically to ensure that they are still performing in alignment with your goals and timelines. However, with a buy-and-hold strategy, it’s much more advisable to do this far less frequently, e.g., quarterly or twice annually.
Third, take a break from the news media. The media wants to sell you advertising, not help you make money in investing. The headlines, news, and projections advanced by the media are often just that, and not valid, well-formed investment advice. Take a break from the media, and stand fast to the hold part of your buy-and-hold strategy.
It’s Hard to Wait
Patience is a virtue, and sometimes, the hardest thing to do is to wait. It may be the best thing to do too. We are always available at Investment Counsel to discuss your portfolio, your concerns, and to help you analyze your investment strategy. While you may win some battles in short-term investing; you’re more likely to win the war if you are willing to look at the markets from a long-term approach and diversify. The best things may indeed come to those who can wait.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.