The Hardest Part of a Buy & Hold Strategy
Whilst Marcellus strategies have significantly outperformed during this fall, they too have fallen considerably in absolute terms. What has been a pleasant surprise though is our clients actually continuing to invest into this fall and new investors rushing to open their accounts. From our conversations with other fund managers in India and elsewhere, it seems like high net-worth individuals and retail investors are exhibiting similar maturity into buying or at least holding into the weakness. Ben Carlson in his recent blog confirms this sporadic anecdotal evidence with data from Vanguard showing only a marginal increase in retail investor activity through what has been one of the worst stock market crashes in history. Whilst it will be interesting to see how this behaviour pans out over the next few weeks if the market fall were to get nastier, Ben uses the context to lay out the hardest part of such a Buy and Hold strategy.
“They show that more than 90% of their self-directed investors haven’t made a single trade during the turmoil. And of the 8% or so of clients who have made portfolio changes, half of them made just one trade (and many of those trade were used to buy more stocks).
This thing could get worse. Maybe this crash happened so quickly these investors haven’t had time to allow the situation to sink in. If stocks don’t recover quickly or continue to fall, it’s always possible passive investors will panic sell.
But don’t go blaming mom and pop for the current volatility. They aren’t the ones doing the selling. If anything, most retail investors are doing nothing or even stepping in to buy.
I’m sure there are bound to be some casualties of capitulation by the time this crisis is over. But that has nothing to do with the type of investment vehicles people are using. There will be long-term investors, short-term traders, hedge funds, institutional portfolio managers and plenty of other investors who will sell for the wrong reasons at the wrong time.
If someone is buying at the bottom that means someone is on the other end of that trade selling to them.
I’m sure there will be stories in the coming months about the death of buy and hold. You can set your watch to it during a serious bear market.
This is only true for those who don’t understand how markets work over the long-term.
If you’re a buy and hold investor it’s important to remember a market crisis such as this comes with the territory. I’m stating the obvious here but it’s worth repeating — the stock market has returned roughly 9.7% per year over the past 90+ years. That 9.7% includes the Great Depression, wars, recessions, rising interest rates, falling interest rates, various political regimes, bear markets, booms, busts, inflation, deflation and everything in-between.
I’m not saying everyone should be a buy and hold investor. Much of that decision comes down to your personality and temperament. There’s no one-size-fits-all investment strategy. But if you decided to become a buy and hold investor when markets were rising, this is the point where the bill comes due.
The hardest part of a buy and hold strategy is that for it to work as expected, you have to do both the buying and the holding when markets are falling too. It’s much easier to both buy and hold when markets are going up.”