Right now the managed fund industry is still in denial that “buy and hold” has failed and will always fail in the long run. Or should I say it will fail every 5-7 years as the funds run up stock prices to unsustainable levels.

This is your opportunity to play a winning hand by “timing a buy and hold strategy” for money you won’t need for the foreseeable future. Is that an oxymoron? Most financial guys will tell you it is.

Even if the stock market didn’t cause its own downfall this time around there was too much paper profit on the table when the sub prime rumors started.

Turning paper profits into real money in your bank is impossible if everyone is invested in the same things and tries to sell at the same time. That’s the flaw their models keep ignoring. They have no exit strategy.

Aggressive buying sending the markets up and then an “event” causing fund managers to panic sell driving the prices down. The result will always be the decimation of your nest egg.

If they can convince you to “buy and hold” while they trade like hell to recover your losses and repeat their silly investment strategy every 5-7 years, then since there is an upward bias in the stock market, over the lllloooonnnnngggg term you might make a profit.

This philosophy gets screwed up when the 5-7 year dip becomes a major bear market like now, and destroys all previous hard-earned paper profits.

I say paper profits because they are not REAL until you CASH OUT those paper profits. If they are not in your hot little hands you should not count them as real.

Despite my belief that “buy and hold” is a flawed strategy there are times when it makes sense Here’s my 7 step strategy for timing a buy and hold strategy.

First you should have money to invest that you know you will not need for several years. Or only invest 10% of your nest egg this way. Money left in the markets with no stop loss strategy is seriously at risk.

Second you need to have a bear market where stocks have fallen significantly so the downside risk is reduced. A market falling 50% is a good place to start.

Third you need to use another strategy I don’t like most of the time and that is dollar cost averaging into the markets on a monthly or weekly basis until you are fully invested with the money you do not need to live on.

Fourth you need to invest in blue chip stocks with no or low debt and “honest management” if that is possible. ETFs and Indexes are a safer option. You are not looking for wind-fall profits only steady returns. Greed is not good in retirement.

Fifth you just have to sit tight and wait, 1, 2, 5, 10 years and when the markets start to move up and the trend confirms the bulls are back you need to begin using stop loss orders to lock in profits. At that point buy and hold is dead. I’ll repeat that buy and hold is dead.

Sixth your main concern now should be to lock in your profit or some percentage of it with trailing stop losses as the bull market takes off. You will need to ignore the market guru’s and be prepared to be kicked out of the markets on a “retracement”. This is the market rewarding you for your common sense - be grateful.

Seventh  stay in cash and wait for the opportunity to repeat the process. Ignore the financial press telling you cash is no good.

No one knows if a “retracement” is merely a dip in the bull run or the start of a bear market. If it is the later your stops will get you out with much of your profit intact, every 5-7 years after a bull market has begun. You just need to sit tight and wait.

I don’t think the message is getting through to financial planners any more than it is getting through to bay boomers. That message is Baby Boomers have to observer and respect Rule #1 - Avoid Large Losses in Retirement.

Chasing high returns by having a high proportion of your money invested in equities (risk-based assets) makes no sense when you are in retirement and especially in this market. I’m talking here only about money set aside to be your nest egg. If you have done that and have surplus money then be my guest, try and make a killing in this market using the surplus money.

Remember it is not the fact that the market is down that is the problem. It is the size of the losses you incur and the time it takes to recover those losses that will affect you directly, especially when you are not adding to your nest egg but taking from it in the form of a pension.

Many Baby Boomers have realised this and are moving their money out of risk based assets into safe assets like bonds, term deposits and cash at the bank. This would seem the logical thing to do for the immediate future. Read the rest of this entry »

In the world of buy and hold the only one doing it is probably you. Everyone else is timing the market and maybe using your money to do it.

Brokers put out regular newsletters to buy, hold, accumulate and occasionally sell stocks. Isn’t that market timing?

Mutual Fund managers feverishly trade stocks in their funds to get higher returns as their commission is based on how big the funds under management are. Aren’t they timing the market? Read the rest of this entry »

We all know the mantra espoused by the wealth management industry about the need for us poor dumb investors to buy and hold because there is no way we can time the market. Yet these very people are doing just the opposite with your money, desperately trying to get returns in a falling market to help justify their high fees and charges. This is what I call Buy and Hold Hypocrisy.

Unfortunately you have to be a very good trader or a mug trying to time this market. The usual statistics apply. Probably less than 5% of wealth managers are any good at market timing. Most of them make their money picking winners in rising markets. In a falling or sideways market they have to be much more nimble and that can be hard to do with large amounts of money to trade (Silly me - I mean invest). Read the rest of this entry »

Today I received an email from someone who maintains it is impossible to be in the market when it is rising and out of it when it is falling. I was investing this way for several years. I also entered the market in March 2003 using my indicators.

I requested more information and received a more detailed explanation of why the sender thought this was so.

This is the email I received to support the statement above. The email contents are in italics and I respond to each paragraph. I want to thank the writer for taking the time to give me their justification so I could respond. I’m happy to keep this discussion going so please all join in if you want to add (or subtract) from what has been said. Read the rest of this entry »

I thought I might try and see how Buy and Hold Non-Strategy held up against a Stop Loss Strategy from the 2000 stock market crash to now.

I know when I watched the market recover from the March lows I was tempted to put some money in the market. But I use stops and my stops would almost certainly have been hit. So I stayed out and will stay out until I get a clear signal to go back in.

Even then I will trade with my “play money” not my nest egg money. If I start to see my play money is not getting whipped out I may start to put a percentage of my nest egg money in the market.

Since I don’t do much chart analysis these days I went looking for something that fits with my beliefs about market timing and could give me an indicator that a Bull market might be happening. But more importantly that the high volatility has reduced so I don’t get whipped out with my stop losses.

Then I thought what if I could do a hypothetical comparison on Buy and Hold vs. using a Stop Loss Strategy over the period 2000 to now. Recent stock market history has more relevance to us Baby Boomers. Read the rest of this entry »

If you are a retiree and use Buy and Hold strategies with your nest egg you may be gambling. If you are relying on this money to live on then you need to manage the risk. I’m talking about Baby Boomers who don’t have much surplus money and will need the bulk of their money to be their nest egg and provide them with a pension.

When you were 20 or 30 years old you could take a stock market crash in your stride because time was on your side and you were contributing to your retirement fund to accumulate your nest egg.

Now both these things are gone. You might feel and believe that 60 is the new 40 but the reality is you are out of time and out of regular income to recover from a major financial loss. You need to face this and protect your nest egg.

There is no doubt in hindsight that Buy and Hold since

the 1980’s has provided good returns over the long term until now. So you may have accumulated a sizeable nest egg if you have been investing since that time. But it is not a given. It is not an unwritten law that this be so for ever and ever. It just happened then and it may happen again - but Baby Boomers should not rely on it.

Read the rest of this entry »

I had an email the other day from Paul one of my subscribers. He asked, “What was a good Stop Lost Percentage to use? He went on to ask if I could provide more information that might help him.

I thought I would answer his question using a post to my blog. However I need to point out that I am not a financial advisor. The information here is based on what I would do personally. You will need to make your own decisions or consult your trusted financial advisor before proceeding.

One concern I do have though is if you have never used stop losses before try using them with small position sizes first using money you might have that is not in your nest egg. Also there are times like now where the market is so volatile it might be best to sit on the side lines. Read the rest of this entry »