Sunday Musings: Questionable Advice

With the major indexes having jumped of a cliff this past week and into bear market territory, questionable (or even downright stupid) advice as to how to handle the current environment has made front page news. Two such stories were featured online, with the first one titled “Set It And Forget It.” Here are some highlights:

When the Dow rockets 300 points or the stocks of retailers, say, get decimated, I devour the news. After all, I work at a financial-news company. But here’s my admission: I’m a buy-and-hold investor, and a lazy one at that. My employer prohibits us news folks to trade equities on a short-term basis anyway, but even if it didn’t, I’d still buy and hold.

The bulk of my portfolio is in two retirement accounts, and neither stock-market gyrations nor major financial earthquakes prompt me to tweak my allocations. I simply hold a fairly routine mix of low-cost U.S. and international stock mutual funds, plus a bond fund, and I stick to it.

Given that I work in a business whose lifeblood springs from finding out what the markets are doing and why, I often question my lackadaisical approach to investing. Shouldn’t I be more worried, particularly in these volatile times?

In a word, no. The fact is, a buy-and-hold investor with a decently diversified portfolio should celebrate her ability to remain firm in the face of financial-news tidal waves which prompt many, less staunch, to jump in and out of investments, often at the worst possible time.

Some might say the staunch investor is akin to a passenger on the Titanic, refusing a lifeboat to safety due to misguided loyalty to the idea of “buy and hold.” But as long as three prerequisites are satisfied, that investor is among the most prudent savers around.

Those three requirements? A well-diversified investment plan, invested in low-cost index funds, with a long-term outlook.

It’s obvious that this author has either no clue what a bear market looks like (or the effect it can have) or her assets are so small that the outcome of a bull or bear scenario is inconsequential.

From the thousands of readers I have emailed with since the last bear market, there hasn’t been one who considers Buy and Hold and the subsequent devastation of assets a viable strategy.

Here’s another news story titled “Now’s the time to buy and hold:”

Investors may be seeing the “peak of negativity” in the markets these days, and that’s exactly why buy-and-hold types should be on the lookout for opportunities, T. Rowe Price’s chief investment officer said on Friday.

“Sentiment is so negative right now that you can’t help but make money in some of these companies if you take a three-year, buy-and-hold horizon,” Brian Rogers told attendees of the Morningstar Investment Conference. He expects it will take the next couple of years for the market to recover.

“Buying into stress is usually a good thing to do. And if you look for where there’s the most stress right now, you go to the financial sector,” he said. There are also opportunities to invest in the higher-quality end of fixed-income markets, including mortgages, he added.

Sure, you should not expect a different tune from a mutual fund, whose sole survival depends on you staying fully invested. “Buying into stress” is no different than buying on dips, which may work in bull markets but is an absolute no-no in bear markets.

Who is to say that this is all the stress the financial sector will experience? From my viewpoint, this market slide is only in the beginning stages (my guess), and those trying to be a hero by buying early will have their heads handed to them on a silver platter.

Even if this turns out to be the bottom, I’d rather wait for confirmation to the upside than taking a gamble and becoming another bear market casualty.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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