Saturday, May 22, 2010

Buy & Hold is Dead

If you still buy the myth that investments should be bought and held for the long term, I suggest you study the following long-term chart of the stock market very carefully.

Those who continue to embrace the widely held investment theories of the past are simply setting themselves up for continued failure. Modern Portfolio Theory, a strategy suggesting that risk can simply be managed through diversification across non-correlated asset classes, is no longer working. It has not worked since the year 2000. Yet, the great majority of so called financial planners, advisers and Wall Street brokers continue to tout it. Seven out of the nine stocks on Goldman Sachs' client conviction buy list have lost money this year, while Goldman has made huge profits from their own proprietary trading. They obviously don't practice what they preach.

The great majority of mutual funds remain 90%+  invested in both up and down markets. If you believe they make an attempt to protect investors from the downside you are badly mistaken. Mutual fund companies themselves will tell you that you need to have your own system of risk management.

The best advice I can give the individual investor is to seek out a competent personal portfolio manager and to shun anybody that advocates holding investments without a viable risk management plan in place.

While markets that merely trend up and down in wide swings is detrimental to the buy & hold investor, this same market movement creates opportunity for clients that employ active portfolio  management strategies.


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