Why buy and hold doesn't work anymore


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R

Rich Carreiro

Bill Woessner said:
http://money.cnn.com/2012/03/02/pf/efficient_market.moneymag/index.htm

Quick summary: Andrew Lo (MIT economist) says technology is one of
the major driving forces of stock market volatility. And volatility
is so high now that buy-and-hold investors are getting shellacked.
It would be interesting to see some of the real research behind his
claims rather than just a CNN reporter's summary. Because the summary
boils down to nothing more than "markets are riskier these days and
that sucks for investors". Which you could have easily figured out
without any deep research.

Also, the markets being riskier/more volatile doesn't mean they're any
less efficient. Efficiency is not the same as rationality. A market
diverging from some alleged "rational" value as it swings way above
and way below the "rational value" doesn't a priori mean the market
isn't efficient.

I'm sure Lo knows all that, which it why it would be interesting to
see what he actually said.
 
E

Elle

I'm sure most of you saw this, but just in case...

http://money.cnn.com/2012/03/02/pf/efficient_market.moneymag/index.htm

Quick summary: Andrew Lo (MIT economist) says technology is one of the major driving forces of stock market volatility.  And volatility is so high now that buy-and-hold investors are getting shellacked.
Inscrutably, Andrew Lo says that buy-and-holders are getting
shellacked because they do not buy-and-hold. For example:

---
Q: Even during the so-called lost decade (2000 to 2010) someone who
regularly put money into a 60% stock/40% bond portfolio would have had
about a 4% return. Why isn't that good enough?

A: Think about how that person earned 4%. He lost 30%, saw a big
bounce-back, and so on, and the compound rate of return over the
period was 4%. But most investors did not wait for the dust to settle.
After the first 25% loss, they probably reduced their holdings, and
only got part way back in after the market somewhat recovered.
---


Then Lo is queried:


---
Q: So what choice do I have instead?

A: We're in an awkward period of our industry where we haven't
developed good alternatives. Your best bet is to hold a variety of
mutual funds that have relatively low fees and try to manage the
volatility within a reasonable range. You should be diversified not
just with stocks and bonds but across the entire spectrum of
investment opportunities: stocks, bonds, currencies, commodities, and
domestically and internationally.

Most of us didn't sign up for the kind of volatility we're seeing
right now. So keep in mind that if you're holding equities, you are
probably taking more risk than you thought.
---

Elle's answer would have been: First, if you can't psychologically
deal with a 30% paper loss, then you should not be in stocks. Second,
stocks are not about getting rich quick. You want to make real money,
get a job, live within your means, save via stock and bond investing
and re-investing dividends. Switch to either more bonds or cash as you
age.
 
T

Tad Borek

Inscrutably, Andrew Lo says that buy-and-holders are getting
shellacked because they do not buy-and-hold. For example:
Yes, exactly! The example he gives for why buy and hold doesn't work has
the investor bailing out, instead of buying and holding - and doing it
at exactly the wrong time.

Which is one of the arguments for buy and hold! If it's your strategy,
you don't do that - maybe you don't even know the market went down. Even
better, you buy-hold-rebalance and take the opportunity to "buy low."
That's low, not Lo, which I'm just not buying.

On the bright side, with another 6 months like the last 6 this genre of
article/economist will fade from view, replaced by "Did you just miss
that? The virtues of buy & hold." Remember when everyone was so freaked
out by high frequency traders that they didn't notice that the US
stock+bond market was at an all-time high? (as were the balanced index
funds that track those markets)

-Tad
 
J

JoeTaxpayer

Yes, exactly! The example he gives for why buy and hold doesn't work has
the investor bailing out, instead of buying and holding - and doing it
at exactly the wrong time.
I'd written "For the 20 years ended Dec. 31, 2006, the average stock
fund investor earned a paltry 4.3 average annual compounded return
compared to 11.8 percent for the Standard & Poor’s 500 index"
Taken from a report by Dalbar. In a perfect world, one would see that
11.8 minus some very small cost, or perhaps even beating the 11.8 with
the effect of averaging in over time. In a high fee world, even 10.8
looks great compared to the 4.3 they calculated.
 
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E

Elle

Yes, exactly! The example he gives for why buy and hold doesn't work has
the investor bailing out, instead of buying and holding - and doing it
at exactly the wrong time.

Which is one of the arguments for buy and hold! If it's your strategy,
you don't do that - maybe you don't even know the market went down.
Now we're talking.
Even
better, you buy-hold-rebalance and take the opportunity to "buy low."
That's low, not Lo, which I'm just not buying.
I almost spewed my dinner-salad onto my keyboard when I read the
above. :)
On the bright side, with another 6 months like the last 6 this genre of
article/economist will fade from view, replaced by "Did you just miss
that? The virtues of buy & hold." Remember when everyone was so freaked
out by high frequency traders that they didn't notice that the US
stock+bond market was at an all-time high? (as were the balanced index
funds that track those markets)
You bet.

You oughta join the folks at the Wall Street Journal site commenting
on Bodie's article. Ninety percent are Dapperdobbs-type (bona fide)
hotshots with all wisdom.
 
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