Advertisement
Investor Psychology

Investors Should Rethink Old Buy and Hold Stock Strategy

Should you stay or should you go? In today’s market environment, investors need to be ready to move.

It’s hard, sometimes, to reconcile the euphoria of a record-setting bull market with predictions that it just can’t last. Especially when the media weighs in with headlines like this one from a 2015 MarketWatch.com piece by columnist Paul Farrell: “Stock-Market Crash of 2016: The Countdown Begins”

Or this one on a 2016 Bloomberg.com story by writer Suzanne Woolley:

Advertisement - Article continues below

“The Next 10 Years Will Be Ugly for Your 401(k): We’re About to Pay the Price for All the Good Times”

Of course, the headlines often take it a step further than the actual articles. Woolley’s story wasn’t forecasting complete disaster – it was simply a warning to prepare for disappointment if you hope to make a decent return on your investments in the next decade.

Sometimes traditions need to change

“It doesn’t seem much to ask – a 5% return,” she wrote. “But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates.”

“Traditional” was her way of describing a portfolio with 60% stocks and 40% bonds. However, I would probably refer to that type of portfolio as “outdated.”

A typical stock-bond portfolio is meant to have a negative correlation in the short run – or, at the very least, a “slowing correlation.” When stocks go up, bonds act like a weight to the portfolio. When stocks go down, bonds act as a parachute. But both stocks and bonds are high right now – and it’s been that way for a while. Which means this type of portfolio is far from the model of diversification.

Time to get active

So where do we go from here?

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

The answer for many investors is going to be trading in their buy-and-hold strategy for more active portfolio management – paying close attention to market trends, shifts in the economy, changes in the political landscape and other factors.

It’s a strategy that’s made for modern times, when we have so many more tools and so much more information available to help make all those “when, what, why, where and how” investing decisions.

For an active portfolio manager, the goal is to limit risk while growing your money. And that requires moving it when necessary – sometimes out of the stock market altogether.

Yes, there are good times to be in the market and bad times to be in the market. Unfortunately, people often get in or out for the wrong reasons – mostly because of greed or fear – and they make mistakes in the process.

Remember the movie Wall Street, when Gordon Gecko said, “Greed is good”? Forget that. Discipline is good.

Advertisement - Article continues below

When you invest in something, you should do your research. And you should not base your financial decisions on what’s going on in the news. You should stay in until some fact-based evidence says you need to get out of that particular investment, unemotionally.

And then you should be ready to go.

Does this 401(k) story sound like you?

I’ve seen 401(k)s where the only real growth for years has been from the automatic deposits the investors have been making. And that’s a problem. The investors are buying and holding or, if they don’t buy and hold, they’re managing it themselves, and their behavior is compounding the problem because they sell at the worst time. They hold on for so long, and, finally, they sell out of fear – usually toward the bottom. Then they wait for the market to “prove itself again,” and when it reaches new highs, they get back in.

It really takes a knowledgeable financial professional, preferably a fiduciary, to know when to make those moves – someone who has the guts to get out and the experience to know when to get back in.

If you’re confused by mixed messages in the media, or you’re concerned about what could happen in your own portfolio, consider working with a fiduciary who will take an active role in managing your account.

Talk about that person’s track record, strategies and philosophy. Make sure their views fit with yours. And make sure you’re comfortable with your choice, because you’ll want to be in contact on a regular basis.

Kim Franke-Folstad contributed to this article.

Advertisement

About the Author

Michael Martin, Investment Adviser Representative

Co-Founder, Legacy Financial Partners

Michael Martin is the co-founder of South Florida-based Legacy Financial Partners, where he is the director of investments and insurance. He is a fiduciary and holds his Series 7 and Series 66 securities licenses. He also maintains life, health and variable annuity licenses in Florida, West Virginia, North Carolina and Illinois.Securities and advisory services are offered through, Madison Avenue Securities, LLC ("MAS") Member FINRA/SIPC and a Registered Investment Adviser. MAS and Legacy Financial Partners are not affiliated entities.

Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy
mortgages

Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy

One 70-year-old’s story highlights the challenges. Prepare for more paperwork and hoops to jump through than you could imagine.
August 2, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Planning for Retirement in the New Normal of Covid-19
retirement planning

Planning for Retirement in the New Normal of Covid-19

Here are four ways we all need to adapt to keep our financial plans on track as the nation grapples with the coronavirus pandemic.
August 6, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020
6 Money-Smart Ways to Spend Your Stimulus Check
Tax Breaks

6 Money-Smart Ways to Spend Your Stimulus Check

If you don't have to use your stimulus check for basic necessities, consider putting the money to work for you. You'll thank yourself later.
July 30, 2020