Buy and hold?

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Jun 2, 2010 3:05 pm

Here is the old question. I see an article in Investment News, " 61% of advisors have increased their cash allocation since May 6th. "

I guess I'm old school, no money has gone fixed in my portfolios since then. Keeping the allocations moderate, with a little "tactical" allocation.

Article says many advisers have decided that buy and hold is an outdated strategy. Really? I do a little tactical around the economic cycle and interest rates, but these events surprise me.

Granted, my portfolios are more conservative than in 1999 ( surprise), but I take that to be the important learning ( growth and income, and suitability, versus timing, and overemphasis on growth - otherwise known as greed).

Jun 2, 2010 6:41 pm

I "Buy and Hold" then manage risk with derivatives while looking for stock market capitulation opportunities...

Jun 2, 2010 7:42 pm

So, does the cost of the derivatives drag down long term performance? I was never very comfortable at calling market capitulation opportunities. Do you know how much value you're adding, above the trailing S&P index? I hear sophisticated RIA firms are adding value to the indexes, but I don't believe it.

I see all of this BS like, " Botique asset managers offer competitive advantages",  (for investment performance), but I don't see research showing ten or fifteen plus year superiority over the indexes.

Maybe I'm just a weenie.

" Advisors make a mad dash for cash". Now that's wild.

Jun 2, 2010 10:59 pm

Yes anytime you try to hedge against the downside you are potentially limiting the upside. If you use the mindset of sticking with the indexes and not trying to mitigate some of the risk you might as well not diversify at all and just place one ticket for EEM or RWR. The idea of using derivatives for me is another way to try and smooth the ride out a little more.

I believe in an up market you cannot beat an index but in a down market you can (apples to apples of course so that depends on the index/portfolio being compared). I am not an analyst but I would hope there are some managers that can even beat an index in all markets. I am not very good at finding them though because mostly their strategies are specific to a set point in time. But if you can find one that has the ability to go long the good and short the bad it can be done but it is so expensive to hire those managers.

The funny thing about investment management is that even if an advisor sucks, over the long haul he will look competent if his clients are invested in a boring 50/50 allocation at least 75% of the time. Heck just stay in above the 200 and out below the 200 and you will probably be fine. Why do you think hedge fund managers, Buffet, Desmarais etc. have strong track records? Because they eat, sleep and shit thinking about ways to make money. Most FAs work 10-2 and spend most of that time playing the game and pretending to be a big swinging @#$%.

Jun 3, 2010 9:56 am

I can't address all the sophistcated strategies, but in basic terms, the purpose of hedging is to limit drawdown.  As we all know, losses have a much greater impact ona  portfolio than do gains.  Think of it this way....if in 2008 you only lost 10%, it meant in 2009 you only needed +12% to break even (rounded up).  SO that's great if you did +40% in 2009, but if you lsot 45% in 2008, you are WAY behind.  Bottom line, if you don't lose much, you don't need to make much on the upside swings.  Remember, the market VERY RARELY even comes CLOSE to the long-term average return in any given year.  SO you NEED to make those huge positive gains in order to offset big down years.  So it's not about making 38% when the market makes 30%.  It's about losing 5% when the market loses 25%.  So good risk managers will outperform in down years, and underperform in good years.  The net effect is beating the markets on a COMPOUND ANNUAL GROWTH RATE (CAGR), which is often much different than average annual returns.

year 1   +5%

year 2   -5%

Average   0%

CAGR   -0.25%

Start with $100, end with $99.75

Jun 3, 2010 10:33 am

Good points. I still maintain that the most efficient way to hedge risk is buy and hold, with the proper asset allocation. Which, long term, is about 60% equity and 40% bonds. Most clients will prefer a lighter equity load. Not trying to prove anything, I just have not been able to find hard evidence anywhere to justify derivatives, market timing, or any other smoke and mirrors. No hard evidence. If anyone knows where to find it, I would be obliged.

Of course risk means loss of principal risk, inflation risk, security risk, interest rate risk, market timing risk ( in or out), and so on, so there can be no perfect system to hedge risk, hence, buy and hold and asset allocation.

Jun 3, 2010 10:50 am

Buy and Hold the S&P 500 starting in 1999/200 and you went backwards.  Yes, I am am cherry picking dates, and this does not include dividends, but you get the point.  Sometimes, you should just not be invested (or take your gains off the table).  Simple analysis of market P/E can help that.

VFINX:

Yes, that's great that you got back to even in 2007 (only to lose it alla gain).  But if you retired in 1999 (or 1998 or 2000), THEN what would you do?  Wait 10-12 years to get your money back?  Most advisors don't understand the secular nature of the markets.  There is no harm in taking gains off the table in favor of consistent income and safety.  I wish I had done it personally in 1999.  For clients, I did take some off the table in 2007, but not nearly enough (the market itself wasn't over-bought as much as 1999).  I also took some off the table over the past 6 months (it remains to be seen whether it was enough ). 

Jun 3, 2010 10:52 am

FYI - Sorry about the chart above.  Those numebrs were copied in as a chart, but didn't come across that way.  Basically, it shows the Vanguard 500 Fund at $135 in 1999, and $100 in 2010.

Jun 3, 2010 12:40 pm

Buy and hold?

It's now called buy and hope.

Try to keep up with the times.

60/40 allocation with client assets left on the tracks is exactly what's wrong with this industry today. And for this you collect a fee?

Jun 3, 2010 12:45 pm

BG, I totally agree.  I just don't, for the life of me, understand how advisors could recommend the same allocation in 1996, 1999, 2002, 2005, 2008, 2010.  Even just a SMALL amount of analysis tells you that there are periods that are so overbought that there is simply no way for things to end well.  60/40 just seems so arbitrary.  If you are going to buy and forget, it might as well be 100% quality equities, or 100% muni's.

Jun 3, 2010 12:57 pm

[quote=Milyunair]

Good points. I still maintain that the most efficient way to hedge risk is buy and hold, with the proper asset allocation. Which, long term, is about 60% equity and 40% bonds. Most clients will prefer a lighter equity load. Not trying to prove anything, I just have not been able to find hard evidence anywhere to justify derivatives, market timing, or any other smoke and mirrors. No hard evidence. If anyone knows where to find it, I would be obliged.

Of course risk means loss of principal risk, inflation risk, security risk, interest rate risk, market timing risk ( in or out), and so on, so there can be no perfect system to hedge risk, hence, buy and hold and asset allocation.

[/quote]What would you consider hard evidence? Do you want evidence that these strategies improve return or rduce risk? 2008 proved that asset allocation has its faults as well. All these components you refer to are beneficial if used correctly. They are designed to either smooth volatility (which is the entire thesis behind asset allocation) or improve returns (which is very debatable).

 

Buy and Hold hedges the risk of not being in the market.

Asset Allocation hedges the risk of volatility.

Market Timing hedges the risk of poor returns (very debatable and hard to do).

Options hedge volatility and risk of poor returns depending on intent.

Every hedge or investment strategy has its place. But you cannot simply compare "Buy and Hold" to "Sector Rotation" or "Buy Write". They are not comparable in apples to apples kind of way.

Jun 3, 2010 2:17 pm

[quote=BondGuy]

Buy and hold?

It's now called buy and hope.

Try to keep up with the times.

60/40 allocation with client assets left on the tracks is exactly what's wrong with this industry today. And for this you collect a fee?

[/quote]

Great example of self- righteous BS. Just like your attack on Beck. High opinion of yourself, BG?

Jun 3, 2010 2:19 pm

[quote=B24]

BG, I totally agree.  I just don't, for the life of me, understand how advisors could recommend the same allocation in 1996, 1999, 2002, 2005, 2008, 2010.  Even just a SMALL amount of analysis tells you that there are periods that are so overbought that there is simply no way for things to end well.  60/40 just seems so arbitrary.  If you are going to buy and forget, it might as well be 100% quality equities, or 100% muni's.

[/quote]

If you're referring to my posts, read them carefully. How about some evidence to back up your narrative claims. You guys suck up to BG the way he sucks up to the socialists.

Jun 3, 2010 2:28 pm

[quote=N.D.]

[quote=Milyunair]

Good points. I still maintain that the most efficient way to hedge risk is buy and hold, with the proper asset allocation. Which, long term, is about 60% equity and 40% bonds. Most clients will prefer a lighter equity load. Not trying to prove anything, I just have not been able to find hard evidence anywhere to justify derivatives, market timing, or any other smoke and mirrors. No hard evidence. If anyone knows where to find it, I would be obliged.

Of course risk means loss of principal risk, inflation risk, security risk, interest rate risk, market timing risk ( in or out), and so on, so there can be no perfect system to hedge risk, hence, buy and hold and asset allocation.

[/quote]What would you consider hard evidence? Do you want evidence that these strategies improve return or rduce risk? 2008 proved that asset allocation has its faults as well. All these components you refer to are beneficial if used correctly. They are designed to either smooth volatility (which is the entire thesis behind asset allocation) or improve returns (which is very debatable).

 

Buy and Hold hedges the risk of not being in the market.

Asset Allocation hedges the risk of volatility.

Market Timing hedges the risk of poor returns (very debatable and hard to do).

Options hedge volatility and risk of poor returns depending on intent.

Every hedge or investment strategy has its place. But you cannot simply compare "Buy and Hold" to "Sector Rotation" or "Buy Write". They are not comparable in apples to apples kind of way.

[/quote]

I'm referring to the idea that many advisors are turning into pussies. Instead of teaching clients about risk, they are capitulating to the fears and emotions of their clients, at a cost. I'd like to see the numbers, where average advisors are beating indexes with "custom" risk management strategies. You know it doesn't exist, anyone with a CFP or CFA could say the same. No big deal. Like I said, I believe in a little tactical around a moderate profile, but in my heart I believe that is more pandering to the individual. Not sure I am adding value, my portfolios are way about the S&P over ten years with much less "risk" (equity percentage), but we'll see what happens going forward.

Just the fact that so many of the advisors here are so apparently politically liberal pretty much backs up the (economic) pussy claim. The fact that they are so righteous is almost scary. Gives new meaning to the term RR.

Jun 3, 2010 2:42 pm

[quote=Milyunair]

[quote=BondGuy]

Buy and hold?

It's now called buy and hope.

Try to keep up with the times.

60/40 allocation with client assets left on the tracks is exactly what's wrong with this industry today. And for this you collect a fee?

[/quote]

Great example of self- righteous BS. Just like your attack on Beck. High opinion of yourself, BG?

[/quote]

No, a low opinion of  your investment strategy. Well, if you can call that a strategy. 60/40 fee'em and forget'em? There should be a law!!

As for your myopic political cheap shots at me, I'm Boston Irish, sticks and stones dude ! But, it really is getting old. This thread is on your vaunted investment strategy. Maybe you should try to stay on topic and leave the cheap shots to political threads. Your time would be better spent proving that your strategy is still valid and worth your fee. Whatcha got?

Jun 3, 2010 2:53 pm

For anyone who wants to have a discussion, obviously, portfolio construction begins with goals, timeframes, and "risk". Retired clients are likely but not always more conservative - I like a range of about 25% to 35% equites for those conservatives who can handle risk. Maybe 40 to 50% equites for moderate, and so on. Tactical to the economic cycle, not geopolitical events. I do a complete portfolio analysis twice a year, and run my b/d affliliated book like an RIA. Yeah, I charge for proactive portfolio management, and general financial advice. Anyone who has a CFA think it's worth adding to the CFP?

Jun 3, 2010 3:02 pm

[quote=BondGuy]

[quote=Milyunair]

[quote=BondGuy]

Buy and hold?

It's now called buy and hope.

Try to keep up with the times.

60/40 allocation with client assets left on the tracks is exactly what's wrong with this industry today. And for this you collect a fee?

[/quote]

Great example of self- righteous BS. Just like your attack on Beck. High opinion of yourself, BG?

[/quote]

No, a low opinion of  your investment strategy. Well, if you can call that a strategy. 60/40 fee'em and forget'em? There should be a law!!

As for your myopic political cheap shots at me, I'm Boston Irish, sticks and stones dude ! But, it really is getting old. This thread is on your vaunted investment strategy. Maybe you should try to stay on topic and leave the cheap shots to political threads. Your time would be better spent proving that your strategy is still valid and worth your fee. Whatcha got?

[/quote]

Haha, Irish, you finally come out of your corner. I don't plan on building your straw man here, lefty.

Jun 3, 2010 3:12 pm

FWIW, I am not even close to the same political persuasion as BG.  And that would actually have nothing to do with my opinion of his investment theory.  Not sure how one has to do with the other.

You turned a perfectly good debate about investment theory into a wet t-shirt contest.  Nice job.

Jun 3, 2010 3:28 pm

[quote=Milyunair]

[quote=BondGuy]

[quote=Milyunair]

[quote=BondGuy]

Buy and hold?

It's now called buy and hope.

Try to keep up with the times.

60/40 allocation with client assets left on the tracks is exactly what's wrong with this industry today. And for this you collect a fee?

[/quote]

Great example of self- righteous BS. Just like your attack on Beck. High opinion of yourself, BG?

[/quote]

No, a low opinion of  your investment strategy. Well, if you can call that a strategy. 60/40 fee'em and forget'em? There should be a law!!

As for your myopic political cheap shots at me, I'm Boston Irish, sticks and stones dude ! But, it really is getting old. This thread is on your vaunted investment strategy. Maybe you should try to stay on topic and leave the cheap shots to political threads. Your time would be better spent proving that your strategy is still valid and worth your fee. Whatcha got?

[/quote]

Haha, Irish, you finally come out of your corner. I don't plan on building your straw man here, lefty.

[/quote]

That's because you've got nothing!  Straw man my butt!!

You push a tired and ultimately useless investment strategy on the unsuspecting. That's indefensible! You're smart not to try to defend it. Aren't your clients tired of getting run over by the same train?

Jun 3, 2010 3:31 pm

We had a waterfall financial event in '08. Considering that such events happen maybe 1 year in 60 or so, is it viable to use those calculations in figuring financial strategies. Face it, some outlying event can screw up any strategy. Taking '08 out of the math, buy and hold may still be reasonable.