No Need To Unload Buy And Hold? Yeah Right…

MarketWatch is still supporting the buy and hold bandwagon as shown in a summary of “No need to unload buy-and-hold:”

For the many investors who are still smarting from the stock market’s 2008 meltdown, buy-and-hold tactics are the same as buy and fold — a deer in the headlights of impending disaster.

In truth, while buy and hold may disappoint stock traders, it’s still a viable long-term strategy for mutual fund investors. That’s because mutual fund managers are not buy and hold investors. A stock fund typically turns over its portfolio completely once a year. The fund’s underlying investments are constantly changing, for better or worse.

The lesson for fund investors is that if you’re comfortable with the job your funds are doing, leave the trading to the pros. Switching in and out of mutual funds invites performance chasing — buying high and selling low — and wreaks havoc on your financial and emotional well-being. The markets are volatile enough with you reacting to every twist and turn on Wall Street.

What wreaks havoc on your financial and emotional well being is being fully invested in a bear market and watching dumbfounded how fast your portfolio can get a 50% haircut. I have yet to find a reader/client who sat on the sidelines during the meltdown of 2008 while suffering from emotional issues.

The story is ignorance at its best. Yes, mutual fund companies typically turn over their entire portfolio once a year. So what? I fail to understand how that helps you avoid losing money? They can turn over their portfolio 10 times a year and it won’t matter. Yes, it will improve performance during bull markets but it will do nothing during bear markets.

Why?

Because the bear does not discriminate as we’ve seen in 2001 and 2008. All stock funds (and even bond funds) will get clobbered. The only way to avoid losses altogether is by being out of the market. Remember, based on their charter, equity mutual funds have to be invested at all times so that the investing public can buy their product.

The only way you can be exposed to mutual funds and avoid/minimize losses is by using bear market or Long/short funds that focus on making money in down markets. Straight equity funds can’t do that so you’re at their mercy when the trend heads south.

It’s amazing to me how articles like the one above still promote the same old theme knowing full well how much pain and agony it has caused for millions of investors. Nothing has been learned from the past, and I am afraid many will repeat their mistakes of holding on for dear life when the next downturn occurs.

About Ulli Niemann

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