Buy and Hold Investing – Dead Or Alive?

There are any number of advisers who have reduced money management to a simple strategy – buy an index fund and hold on forever.

There are also those who have advocated such a strategy, but have recommended that you select a portfolio of ‘blue chip’ stocks, and hang on to them as a long term strategy. After all, isn’t this just the strategy followed by the most famous investor of our time – Warren Buffett?

The results of the stock market of 2008 has put the ‘buy and hold’ investors to the test. Do they have the time or the patience to wait out the market place? Will those favored blue chip stocks ever return to where they were at the beginning of the year. Will some of them even survive? These are questions that even challenge the experts?

It must be a real challenge for an investment adviser these days. Certainly, it is not an enviable position to be held responsible for a trusted client’s financial future when even a stalwart ‘blue chip’ such as General Electric has fallen on such hard times. Even Mr. Buffet’s flagship stock, Berkshire Hathaway, has experienced a 30% haircut for 2008. To simply to return to the price at the beginning of the year, you need to have over a 43% return. How long that will take is anybody’s guess.

So, even the expert stock picker is not immune from the stock market downswings. The question is: What is the average guy supposed to do?

You may be 20 years away from retirement, or you may already be retired. In either case, you must find the solution to this problem. Here is a simple answer: GO FOR THE GUARANTEES!

Where can you get these ‘guarantees’? Consider insurance contracts! If you want to be more specific – annuities. In 2008, this is where many people have accepted as sales of annuities are reported to have increased over 60% for the year.

If you answered that Government bonds were the answer for you, you may be under the impression that these guaranteed investments were free of risk. Sorry to break the news to you, but these ‘risk free’ investments do actually come with some risk. The subject of ‘risk’ is left for another article, but you would be well advised to become familiar with the term ‘interest rate risk’.

For some people the answer is to simply use certificates of deposits from banks. One person heard recently was that the investor simply used a continuous rollover of CD’s, and he was under the impression that he was receiving a 4% yield. He took a look at the report I gave him and saw the word annuity, and immediately stopped reading. It was interesting that the information would have guaranteed him a $20,000 increment to his retirement account – it could have been more, but never less. And, it would not have exposed his nest egg to stock market declines or ‘interest rate’ risk.

If you are willing to consider a stock market based investment, there are annuities that allow you to do so. Unlike the index funds that so many recommend, these annuities have the ability to lock in you values at specified intervals, so that subsequent downtrends do not impact your prior gains. Yes, they charge a fee for this benefit, but all those who have seen their retirement accounts trashed in 2008 would love to go back and pay those fees so that their account values would continue growing as before.

The use of insurance contracts eliminates the question of ‘buy and hold’. There is no reason to change when your account growth is guaranteed regardless of what happens to the stock market.

Sometimes it is puzzling to see how devotion to a fixed idea is so entrenched that it works to negate their personal financial welfare. Negative information from so-called experts regarding the use of insurance contracts is to be expected, as experience confirms. It turns out to be very costly mis-information in many cases, and it the inspiration for this writer to continue efforts to provide accurate planning information to those who are open to receiving it.