We recently explored the first flaw and the second flaw with Wall Street’s buy-and-hold mantra.
It’s enticingly believable… we’ve been told stocks go up in the long run. (The first flaw.)
Although your success with buy-and-hold is greatly dependent on luck. Those who happen to begin investing just as a secular bull market is getting underway enjoy a majority of the market’s gains. (The second flaw.)
But get this…
Even if you’re lucky enough to find yourself at the beginning of a bull market, you’ll eventually encounter the third flaw with buy-and-hold.
That is… most everyday folks simply can’t do it!
Consider what Warren Buffett has said about investing in stocks… I’ll paraphrase:
“If you can’t stomach watching your portfolio lose 50% of its value at any time, you shouldn’t be investing in stocks.”
By this definition, I think most everyday folks shouldn’t be investing in stocks! Not with buy-and-hold, that is.
Here’s the cruelest thing about buy-and-hold: It assumes that if you have enough time between today and retirement, you can simply ignore the short-term gyrations and volatility inherent in stocks.
In theory, it sounds all good and well.
But as the late, great Yogi Berra said:
“In theory there is no difference between theory and practice. In practice there is.”
In reality… in practice… almost no one is able to ignore volatility… sit through pullbacks, corrections, and bear markets… and sure as the day is long, when a full-blown market crash rolls around, as it did in 2007/2008… every well-intentioned buy-and-holder turns into a panicked buy-and-FOLDer!
You see, part of the problem with buy-and-hold isn’t the strategy itself… it’s with the misbehavior of investors who try (but fail) to follow it.
Long-term buy-and-hold investors always have good intentions when they’re new to saving and investing. And, of course, alsoduring bull markets.
But when a bear market strikes — let alone a full-blown global financial crisis like we saw in 2007 and 2008 — most investors panic.
The majority of investors simply can’t keep their paws off the panic button when stock market calamity strikes. Most investors buy… and hold… but eventually jump ship when things get dicey.
That’s the painful part of this story… most buy-and-hold investors don’t abandon a bull market when it’s down 10%. Most investors don’t sell stocks when they’re down 20%. Cruelly, most buy-and-holders sell stocks at precisely the worst time — when they’re down 35%… or 45%… or 55%… or worse.
That’s why the average stock market investor does worse than the stock market — most simply can’t stick to the “hold” part of buy-and-hold when times get tough. They jump ship at theworse time, killing their chances of earning the market’s return.
I saw this first-hand in 2008. I was working as a financial advisor for a Fortune 500 firm.
And I have the stats to back it up.
Over the years, Dalbar Research has been collecting and analyzing the real-world buy-and-sell orders made by everyday investors. What they’ve learned is pretty shocking.
Their research shows that real-world investors miss out on between 60% and 90% of the market’s return! And that’s mostly due to the fact that investors abandon buy-and-hold out of fear at the worst times.
This is the third major flaw with buy-and-hold.
Investors want to believe in it… but most everyday folks simply can’t do it.
In theory, buy-and-hold has a lot of merit. But in reality, most investors fail to achieve the market’s lucrative long-term returns — for, let’s say, reasons of “user error.”
Editor, Secrets of a Seven-Figure Trader