Wednesday, December 16, 2009

Risky Business for Buy and Hold Investors

Long-term investors would have some recent painful experiences both in early 2000, 2008 and early 2009. One would argue that it still is a good strategy in a long run. It may be true, however if there are certain simple strategies that could avoid some of the ugly down turns, why not exploit it and use it.

ETF guru Tom Lydon of ETF Trends said the following (12-16-2009):

"If you’re a long-term investor, you may have lost a good chunk of your wealth in the market’s crash. It’s because of this that the buy-and-hold mantra is softening to a whisper, and another strategy to use in conjunction with exchange traded funds (ETFs) is supplanting it. The S&P 500 has declined about 25% since January 2000 (11% when dividends are factored in). The Barclays Capital Index of Treasury bonds has delivered 85%, including capital gains and interest, and an index monitoring 30-year Treasuries produced a total return of 116% in the past 10 years, writes Michael Mackenzie for The Financial Times.

Analysts believe this “lost decade” for equities came after the bull market of the 1990s. Alan Ruskin, strategist at RBS Securities, sees that the “sheer volatility was very hard for buy-and-hold investors to stomach.” Stocks weren’t able to meet the overly optimistic profit expectations that ended in early 2000, which lead to reduced interest rates. [Why buy-and-hold is dead.]

The interest rate cuts and easing of inflationary fears bolstered government bonds. The current 10-year Treasury yields is around 3.5% is quite low as compared to the February 2000 10-year note with 6.5%. Ruskin thinks that bonds, which are at relatively low yields, may not beat out equities unless a round of deflation emerges.

The buy-and-hold method has worked  in the past, but many investors have learned a painful lesson after the last two recessions: hanging on for dear life can result not only in lost money, but lost time. Is the answer found in hiding from equities? Not necessarily. There are lots of uptrends out there – it’s just a matter of learning to spot them and, most importantly, act on them.

If investors can follow a simple discipline that has a higher probability of success, they’ll be motivated to do it. That’s why we use the 200-day moving average strategy. It’s easy to implement and simple to track. For a more detailed explanation of the strategy and to learn more, take a look at our book: The ETF Trend Following Playbook." (click here for more details)


  1. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


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  3. Thanks Lucy and I am glad that you enjoy it.