Theres a major misperception of what a buy-and-hold investment strategy is and Im not exactly sure where it came from. But it has become the source of jokes and seems to be a strategy that many advisors want to avoid at all costs.
Im sure youve heard some of these: Who wants to buy and hope? or In this day and age you have to be nimble, and buy and hold sounds like youre not doing anything.
Im confident that one source of this negative viewpoint has come from the active management industry.
I know this because for the first 10 years of my career I represented the active management industry, and it was heavily positioned to paint buy and hold in a negative light so that advisors and investors would just do something and hire us.
By doing something active managers mean trying to beat the market by either identifying winning stocks or accurately timing when to be in and/or out of the market.
But scores of academic research shows us that active management cannot predictively beat a passive market index. Unfortunately, this huge truth does not stop the active management industry from continuing to present actively-managed funds as a valid long-term investment strategy. This does not mean that active management can never beat the market or mitigate a market downturn in the short run. What it does mean is that nobody can predict which active managers will succeed. Not surprising, since their success almost always boils down to luck and not skill.
So heres the ah-ha moment: If advisors and investors believe that a buy-and-hold investment strategy does not work, then they got it right.
Yes, you read that correctly. A buy-and-hold strategy does not work consistently if you are buying and holding only traditional actively-managed investmentsand we know that 74% of all investments are invested this way, according to Morningstar research.
A recent study by Richard Ferri, CFA and Alex Benke, CFP®, describes how a diversified portfolio of actively managed funds has a high probability of underperforming a diversified portfolio of index funds. The probability of underperformance increases as you add more active funds to each asset class and as you increase the time period for holding the positions.
In other words, if you have a diversified portfolio of actively-managed investments, a buy-and-hold strategy is probably not a good idea.
But what if we rethink buy and hold, and view it as the buy-the-market-and-hold strategy?
A buy-the-market-and-hold investment strategy uses index or asset class investments to build a diversified portfolio with the purpose of ensuring that investors receive the return of the overall market.
After all, should the message to investors be that in order for them to enjoy retirement and not run out of money they will have to beat the overall market? If that is the message, then very few investors will ever reach their goals.
A buy-the-market-and-hold investment approach keeps the focus on minimizing expenses and taxes, controlling risk and planning while managing behavior in the long run.
I urge you to rethink your investment strategy and ask yourself the following question: Are you not following a buy-and-hold strategy because youre using active managers, or are you not using a buy-and-hold strategy because you have not experienced how it works using index/asset class investments?
Thank you to those of you who are employing investment strategies that have a high degree of probability that investors will get the investment returns that are rightfully theirs the markets.
Steve Atkinson is the executive vice president and head of advisor relations at Loring Ward,
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