Tuesday, June 30, 2009

The Death Of Buy And Hold....Only Idiots, Salesmen, and/or Idiot Salesmen Need Apply

I read a very good post on My Money Blog the other day regarding the death of the buy and hold strategy. You can see the article complete with spreadsheets and graphs here. This is a must read for beginning investors.

A regular reader Don sent me a post entitled Long Term Buy And Hold Is Still Bad Advice. Okay, fine, everyone and their mom has been telling me this recently. But I read it, and it was such a bad analysis that I had to rebut it here. I think Mish writes a lot of useful and thought-provoking stuff on his popular blog, but he really missed a big error here.

The sky is falling! Oh wait, there’s a little fine print.

TC is ignoring dividends

Let’s bold that. The analysis and data above completely ignores the dividend return of the S&P 500. This is like buying an investment property and ignoring the rent payments coming in. What? There are checks coming in every month from the tenants? Nah, let’s not cash those.

The post goes into a lot more depth and explanation but the example above is one that you will likely hear again in one form or another. I have been hearing that the buy and hold strategy is a poor strategy a lot lately as well. I think it is an idiotic argument at best, especially for the everyday average Joe investor. Even if our traditional view of the market has changed or is now ‘wrong’, taxes and the fees associated with the markets have not changed. If you consistently buy and sell, fees and taxes will eat you alive. Unless you either have the skill (questionable at best) or through blind statistical luck end up being a rock star fund manager/investor it is nearly impossible to overcome taxes and fees over time let alone beat a low cost index fund. If you want to take those odds be my guest, just send a copy of your W-2 to me as to remind me what not to do while your at it. The way I see it, I have no choice but to be a buy and hold investor. I have accepted that I cannot time the market, I cant predict the future and I don’t have increased skill or access to information. The only logical thing for me to do is to control what I can control, like how much I invest and into what asset allocation I put that money into, and to keep on trucking. Anybody who tells you differently is either selling you something, is dumb, or unfortunately is both selling you something and dumb.

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