Monday, August 29, 2011

Buy and Hold is Dead! (but is it really?)

Don't look now, the but Buy and Hold investment strategy is dead. Again. So says hedge fund manager Simon Baker, the CEO of Baker Ave. Many have said so in the past, and many will doubtless say it so in the future, Baker is just the most recent.

I don't know about you, but every time I hear some expert make this proclamation, my mind flashes back to that scene in Monty Python's Holy Grail. You know the one where the guy is walking through the plague ridden streets of some England village calling, "Bring out your dead!" and one hapless old man being carried to the dead cart claims, "I'm not dead!"....

Well, that old man is Buy & Hold.

Mr. Baker argues that buy & hold is a "relic of a bygone era when the economy was stable and consistent growth was the norm."

With all due respect to Mr. Baker, I would argue that his definition of Buy & Hold is much closer to Buy & Neglect. It's a common misunderstanding of buy and hold that many people have. Buy and hold does not mean, buy shares of stock or mutual funds and forget about them for 30 years.

The point is that most people cannot time the market, and doing so is a fool's game. Besides, the data shows that buying and holding works pretty well when the investor continues to buy on the down turn.

To his credit, Baker is not arguing that individual investors should try to time the market, just time the major crashes. ;-)

His point seems to be that buy and hold does not work in times of high market volatility, but I think for most investors it's fine as long as they continue buying. After all, that's dollar cost averaging and it's one of the pillars of saving for retirement.

I think the heart of his argument is risk. He says that it's a risky market these days, and guys like Jack Bogle don't want to consider risk. But what is risk? To a certain extent, risk is a function of time and in the short term, risk is very high. But in the long term, risk is much lower and that's where this whole argument breaks down.

It's apples to oranges in terms of investing for the long term vs. trading for the short term.

Here's the video interview with Simon Baker so you can hear it straight from him:


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