The Downside of Buy and Hold Fund Investing

Implementation of beneficial investment tactics is never easy, even with the assistance of accurate automation software. There are many different methods utilized for investment purposes, including placing money into mutual funds or ETFs to diversify a portfolio over a long period of time, which is also known as buy and hold investing.

Based on years of investment experience and research, stock professionals generally agree that portfolio allocation should go as follows: 10 percent in U.S large cap blend, 10 percent in U.S. large cap value, 10 percent in U.S. small cap blend, 10 percent in U.S small cap value, 10 percent in U.S. REITS - Real Estate, 10 percent foreign large cap blend, 10 percent foreign large cap value, 10 percent in foreign SM/MD cap growth, 10 percent in foreign SM/MD cap value, and 10 percent in emerging markets.

This structure spreads the money in many different areas, increasing the chances of getting a big return, and minimizing risk. When one of these areas becomes more lucrative, you can easily adjust your investing strategy appropriately. The downside is not in determining whether allocations like these are tried and true, but how difficult it is staying invested during bad times and good times, which is a requirement to capture the benefits of any buy and hold investing strategy.

Intelligent Robot Portfolio Builder

Nowadays, there is a proliferation of computer programming software specifically designed to streamline the investment process. One of these intelligent systems is a robot that examines historic trends, and which develops a pie chart on how you should allocate your resources. The pie chart is rebalanced from time to time.

Does the software help with buy and hold investing? It might be easy to believe in the accuracy of these computer programs. They can extract data from the past better than any human, but how good are they at predicting the future? Buy and hold investment strategies involve staying true and confident in your portfolio, and not letting day-to-day trends influence your portfolio too much. With a robot that frequently adjusts your allocation, buying and holding is much more difficult to maintain.

Keys to Proper Implementation

Informational resources like purefinancialacademy.com say that buy and hold is a legitimate strategy. However, just like this strategy can end with large returns, it can also lead to unrecoverable losses if not implemented correctly. There are a few major concerns when using the buy and hold strategy.

Stocks can go decades without making the slightest bit of progress, and investors are required to hold through a market cycle in the worst and best of times—and buy and hold rebalance allocations are frequently hammered in bear markets.

The allocation for long-term growth generally follows in the same direction the market does. This strategy is heavily influenced by the Dow, NASDAQ, and S&P 500. The best time to implement this strategy is when the market is up, and you need a strong resolve and patience to stay true when the market is down.

If your plan requires growth in order to lead to a good return, the waiting period can be much higher than expected. If you were 50 years in old in 1929, five to ten years shy of retirement, and you invested in the stock market at age 50, you would have waited until you became 76 years of age just to break even. This strategy is designed for lifetime implementation, and you should not expect significant short term gain.

That period in the 1920s could be a unique period, but, with the same experiment in 1965, you would have had to wait until you were 72 in order to break even. This is the downside of buy and hold implementation: It is limited by how well the market is doing as a whole.

Modern Market Implementation

Because the whole premise of buy and hold is founded on historical returns and stock market history, it makes sense for an investor to ignore the more difficult periods in financial history in hope of a brighter future. The recent recession in the 2000s had the same exact outcome, with little progress being made for aspiring retirees between the age of 58 and 70.

Successful implementation of buy and hold requires the retention of ETFs and mutual funds through bull and bear markets. How bad can it get with the latter? History says that this strategy works, but the question is whether or not it will work for you when you need it to.