Give yourself a hand if you stuck it out during the financial crisis of 2008. Research shows that your discipline is beyond the pale. In a July 25 column, Chuck Jaffe of MarketWatch says that a leading money manager and behavioral finance expert claim that the buy-and-hold approach is “unrealistic and impossible.”
The researchers don’t argue that buy-and-hold isn’t a sound strategy, only that most of us can’t maintain the discipline of the approach through bad times.
Buy-and-hold “might sound like good advice because on paper, when you take a look a the S&P over the last 10, 20 or 30 years, the performance looks pretty good the longer you go,” says Andrew W. Lo, director of the Laboratory for Financial Engineering and manager of the ASG Diversifying Strategies Fund. “The problem is that the advice is just not realistic. You can’t expect an investor to live through 2008-2009 and be perfectly happy to see their investments decline by 50%.”
C. Thomas Howard, director of research at AthenaInvest, suggests that we tend to abandon a strategy we trust in hard times. “There’s lots of ways to make money in the stock market, to be successful,” he says. “The key is that you have got to master your emotions, follow a narrowly defined strategy and consistently take only high-conviction positions over time.”
I’d add that investors sometimes abandon successful strategies during good times. It’s easy to believe in your genius when all your picks are going up and believe that you have a better system than tried-and-true ones.
Discipline is also important when your stocks are rising. You need to ride herd over your portfolio, looking for opportunities to improve potential return. You also need to pay much more attention to valuation, as adding reasonably priced stocks to your portfolio becomes more difficult as the market continues to rise.
We have met the enemy, and he is us. Fortunately, the Stock Selection Guide, a tool for identifying quality stocks selling at reasonable prices, serves as the better angel of our nature.