Buy and hold?

Jun 2, 2010 7:05 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Article says many advisers have decided that buy and hold is an outdated strategy.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 10:41 pm

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

Jun 2, 2010 11:42 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 3, 2010 2:59 am

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 1:56 pm

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 2:33 pm

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 2:50 pm

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:

Dec 1999 135.3300 USD Dec 2000 121.8600 USD Dec 2001 105.8900 USD Dec 2002 81.1500 USD Dec 2003 102.6700 USD Dec 2004 111.6400 USD Dec 2005 114.9200 USD Dec 2006 130.5900 USD Dec 2007 135.1500 USD Dec 2008 83.0900 USD Dec 2009 102.6700 USD May 2010 100.6800 USD

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 2:52 pm

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.