I have a confession to make.
When I first became an investment manager, I followed the “buy and hold” strategy that almost every investment manager in the industry follows. That strategy served my clients well through the 1990s, as the stock market soared.
In the new millennium, though, as the market turned down, I couldn’t understand why my colleagues were advising their clients to sit tight. There were plenty of warning signs leading up to the crash that began in September 2000. Yet the firm I worked for was telling their clients to “buy and hold.”
Why?
This passive strategy made no sense to me. Weren’t we being paid to provide investment advice? If investing were about doing nothing, couldn’t our clients just do it themselves?
Doing nothing, it turned out, carried a big risk. Over a 30 month period, the S&P 500 sank 49%. Those who were heavily invested in small-cap stocks lost even more.
I saw that those who were retired, or nearing retirement, could not afford the risk of buying and holding. That’s when I became an active manager.
The change has served by clients well. There is never a guarantee of making money, but client assets were protected when I advised my clients to sell off their stock investments in 2008. While investors following the “buy and hold” strategy saw their portfolios plummet in value, my clients did not.
Clients are, of course, interested in having the highest possible total return. Long-term, the best way to achieve that goal is to seek high returns during bull markets, but to protect client assets by avoiding risk during bear markets.
Why So Many “Buy and Hold”
Active management seems like common sense to me. But I often wonder why so many investment managers still cling to the “buy and hold” strategy. Possible reasons include:
- Everyone is doing it, so it must be right.
- They’re doing what their company requires them to do. If you work for a big brokerage, active management is not an option.
- It’s easier than active management.
- They don’t know that there is an alternative.
- Admitting that your strategy is wrong would result in shareholder suits.
- Overall, “buy and hold” is good for the market. If every investor sold off their stock in September, the market would have collapsed.
- It’s what they were taught when they learned about managing investments.
Investment managers will likely continue to stick with their “buy and hold” strategy for many years. Investors, though, have other options.