Investors Should Rethink Old Buy and Hold Stock Strategy

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:

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

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

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 However, I would probably refer to that type of portfolio as “outdated.”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?

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.

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.