by winston » Wed Aug 13, 2008 9:07 am
A Wall Street Myth About To Be Shattered? by Gary Halbert
For decades, Wall Street has preached the buy-and-hold mantra (read: never get out of the market). They continue to warn that if you get out during the downtrends to minimize losses, you are likely to miss the uptrends. Therefore, you should stay fully invested at all times, take a long-term view, and be prepared to ride out some nasty bear markets and big losses along the way.
As the buy-and-hold strategy increasingly came under fire after the last couple of bear markets, Wall Street simply repackaged and renamed the buy-and-hold strategy and called it "asset allocation." Sounds much better, doesn't it? Asset allocation implies that you spread your investments over several asset classes (stocks, bonds, etc.). But the strategy is still the same: you buy and hold, and subject yourself to large losses whenever the asset classes hit a bear market.
Now, let's reasonably assume that millions of Baby Boomers are behind the curve in saving for their retirement, and that they need the stock market to boom over the next five years or longer to bail them out. Next, let's also assume that most of these Baby Boomers are also invested in the traditional buy-and-hold strategy that Wall Street has preached for years.
So what happens if the stock markets (and the bond markets for that matter) essentially go sideways, or only deliver single digit annual returns, over the next five years or longer? I think it is safe to say that there will be a revolt. Add in a recession, if we get one, and "revolt" could be putting it mildly! Baby Boomers could reject Wall Street's buy-and-hold mantra in a stampede.
Why? Because Baby Boomers no longer have 20-30 years to hold on as Wall Street suggests. Retirement for most will come much sooner, for many in the next 5-10 years. And if the stock markets continue to go sideways, or even marginally higher, over the next several years, Baby Boomers are going to become increasingly restless, to say the least.
Avoiding Big Losses Is The Key
My advice over the last 30 years has been consistent: avoid the big losses. In my view, you don't have the luxury of simply riding out bear markets and hoping you won't bail out near the bottom as so many investors do. The following "Breakeven Table" illustrates just how hard it is to come back from large losses.
Amount of Loss Incurred/ Return Required To Break Even/
10%/ 11.1%
15%/ 17.7%
20%/ 25.0%
25%/ 33.3%
30%/ 42.9%
35%/ 53.9%
40%/ 66.7%
45%/ 81.8%
50%/ 100.0%
60%/ 150.0%
70%/ 233.3%
I have consistently argued for "active management" strategies that can move you to cash (money market) or hedge long positions during bear markets and/or major downward market corrections, as a part of your overall portfolio.
The financial media decided some years ago to vilify active management strategies that can take you to cash from time to time as "market timing," and assured the investment public that market timing is impossible. Making matters worse, there were some market scandals in recent years that were deemed as ‘market timing' or ‘late trading,' when indeed they were nothing close or similar to traditional market timing, which simply seeks to take you out of the market and into the safety of cash, or hedge long positions, during major market downturns.
I have made a successful business out of promoting alternative investment strategies, including traditional market timing. We spend a lot of money each year seeking out active managers that have been successful in protecting clients from significant stock market downturns. Granted, there are many active money managers that have not been successful, but there are those who have admirable performance records.
The money managers I recommend in general:
1) have matched or exceeded stock market returns over time; but more importantly,
2) have limited losses during down market periods. This can be a WIN-WIN combination. Of course, past performance does not guarantee future results. The problem is, most investors don't know how to find these successful money managers.
1) As noted above, Wall Street has advocated for years that a buy-and-hold approach to your investments is the ONLY one that works over time; the stock market always goes up over time, right? But not if you seriously look at the chart above which shows multi-year periods when the stock market goes sideways or down.
2) Many investors have been conditioned to believe that their financial advisor/broker needs to be local, so you can sit down with him/her face to face every now and then. Fact: I have over one thousand clients all across America, and I have never met the vast majority of them. We do just fine over the phone.
3) Because many investors have been indoctrinated to Wall Street's mantra of buy-and-hold and asset allocation as the only way to go, they are therefore not open to active management strategies that just might get you out of the market during big downturns, or "alternative investments" that offer additional diversification beyond stocks and bonds.
4) Most investors are reluctant to change. Old habits are hard to break. We learn what we are taught, and it is hard to change, even if we need to in order to meet our financial goals. That will soon change, I predict, especially for Baby Boomers who are approaching retirement and are banking on a new bull market in stocks to bail them out.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
It's a tempest and so it's pointless to do so.
