Why I Don't Believe In Buy and Hold Investing
Pop Culture Finance will tell you that you should buy and hold your investments and ride it out for the long-term. They come up with all of these statistics of how it is better for you as an investor. There is some merit to buy and hold investing. However, it is the mentality of the buy and hold investor that is the problem. Let's take the 25-year old that is going to invest and hold for 40 years until he is 65. He invests his money faithfully. He goes through good markets and bad markets. He goes up 100% and then loses 50% of it and rebounds again. Now he is 65 and feels pretty certain that he has a good investment philosophy.
What are his beliefs about investing?
40 years of investing has created a few beliefs. First, you invest and never move the money out of those investments because the market always comes back. Second, he has no experience in risk management strategies. So, he just stays the course with what has always worked for him. Third, he hasn't developed the skill set of making investment decisions. This is critical in investing.
So what is he going to do when that bear market comes along during his retirement years? He will do what has always worked. He will stay in invested. Dropping -50% in a bear market when you are in retirement and taking money out each month can send a retiree back to work.
So, what is the moral of the story? There is a time to buy and hold and there is a time to play defense. Pop Culture Finance rarely addresses the problem when an investor doesn't have the long-term to rely upon. Playing defense is a skill you develop through the years of your investment journey. Believe me, you are going to need that skill in retirement. Continuing on with a buy and hold mentality in your retirement years can be hazardous to your financial health.