Buy and sell investments were all the rage just a few years ago. People would invest in a new, hot tech stock, hold on to it and reap the benefit of their shares rising drastically. Warren Buffett was a major supporter of buying and holding, and the strategy led him to being one of the richest men in the world.
We’re here to tell you that the buy and hold is dead for the individual investor thanks to risk management.
Buy and Hold’s Main Flaw for Asset Allocation and Investing
Buy and hold is ideal for institutions that have an infinite lifespan. A business that can be around for a hundred years doesn’t need to concern itself with the prospect of their stock fluctuating up and down and potentially losing 50% of its value.
These institutions can continue holding until the stock recovers, which is something that a person nearing retirement may not be able to do.
A regular individual that is investing and holding is unlikely to withstand a plummeting stock market.
Risk assessment is an option that allows investors to interpret and react to a changing market. For example, the risk assessment for the most recent market crash could have helped a lot of investors keep money in their retirement and investment portfolios.
Between 1999 and 2013, the S&P 500 was below its average until mid-2013.
Tens of millions of investors needed their money during this time. For example, a person in 1999 at 55 might have needed just average returns over the next decade to retire comfortably. But the market dipped by as much as 50%, causing the investor to put his life on hold.
Massive fluctuations in the market, even over a 10-year period, can be devastating for an investor or someone that has been growing an investment portfolio for retirement because 10 years is a long time.
Risk Management is Not Timing the Market
Risk management is about the ebb and flow of the market. When the market starts to become too risky, a risk management approach will take immediate measurements in the market to reallocate investments to help avoid massive losses.
And there are a lot of approaches that we take to determine risk, including:
- Supply and demand balances to better understand how an investment may pan out in the short-, mid- and long-term.
- The inner workings of a market. This helps us determine what the lows and highs are for a certain industry’s stock to pinpoint potential risks that an average investor may not realize is happening in the market.
Risk management also includes another important aspect: when to get back into the market. For example, when the market began to tank in 2006, a lot of investors sold off their stock and never really got back into the market because they didn’t have the data to properly calculate their risks.
Proper risk management can alert an investor when the market is good to enter again and when, even if it’s difficult, it’s time to offload an investment.
Risk Off and How a Risk Manager Determines When It’s Time to Reduce Risk
Risk is all based on a timeframe. In most circumstances, there’s a short and long timeframe that may indicate that it’s time to offload certain stocks. A long-term timeframe may be based on supply and demand measurements, especially internally in markets where these factors aren’t witnessed by the average investor.
Oftentimes, when markets are seeing a sway in supply and demand, it’s months after these internal factors are being recorded.
Rebalancing a portfolio to remove assets that may suffer from these factors is a good idea, and you may stay out of these markets for the long-term, which can be five, six or even ten years. Short-term factors also play a role in risk management.
A short-term indicator can help a portfolio withstand short-term fluctuations, such as those seen with COVID. Stocks fell in the first-quarter of the year but rebounded, which allowed someone considering their risk to reenter the market at the right time and reap the growth seen just a quarter or two after.
Multiple timeframes can be followed, which are tailored to a specific client and based on:
- Declining internals
- Supply and demand
- Improving fundamentals
Buy and hold is a good strategy for some, but as you age, risk management needs to takeover. The risks that you can face when you’re younger shouldn’t be a part of your portfolio later on in life when you have proper risk management in place.
Risk management models can help predict a market’s direction, allowing investors to capture a market’s upside while not capturing a lot of downside.
While you’ll always capture a little upside and downside, the right data and management strategy will allow you to capture more of the upside in the market, reducing risk and generating more gains in the long-term.
If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’.
In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.