Buy-and-hold: Too simple to work?

Anybody who's got a nickel in the markets these days is a bit on edge, and most people are looking at some losses. So I was not surprised when a new financial planning client called to express her concern that her brokerage account - still with her old broker - had "lost a lot of money." "How much did you lose?" I asked.

"Forty-six thousand three-hundred and two dollars," she said.

Ouch. Since I hadn't seen her account statement yet, I asked a simple question that every good investor should be able to answer...

"How were you invested?"

She didn't know. But when she mailed me her statements, I could see why she was suffering. While she held a moderate mix of equities and fixed income, the bonds were junk (more like toxic waste, actually), and had been slammed. The stocks were concentrated in the financial services sector (uh-oh) and got clobbered, too. From what I could tell, there was no strategy to speak of.

As I began to make recommendations to clean up the account - including some sell orders - I thought to myself, "Wait a minute. Shouldn't we just hold on to these securities until they rebound?" After all, the good, old-fashioned rule of "buy-and-hold" is one that has stood the test of time, for some.

And then I thought about the three rules of "buy-and-hold" investing.

  1. Diversify thoroughly. If you bought-and-held an an all-Japan portfolio in the 80's or an all-tech portfolio in the latest decade, then you know that buy-and-hold may mean you're holding on to your investments for a very, very long time. To make the waiting game more comfortable for yourself - and to avoid big losses for your family - it makes more sense to spread you investments out, gaining exposure to a wide variety of opportunities. Mutual funds make this a snap.
  2. Buy quality. When you buy quality investments, like tax-efficient index funds for example, there's less to worry about. And when you're not worrying about your investments, it's easier to hold on to them.
  3. Stick with your strategy. Physicians who handle money well often adhere to a fundamentally sound strategy. They know why they are investing and what to expect from their investment, both bad and good. Some physicians who make mistakes with their money - the kind that can add years to your work life - dumped a perfectly good strategy because they didn't understand it, and many lacked a strategy to begin with.

Not Simple, But Complete

The three words "buy and hold" are too few to describe an excellent investment strategy. So here's the unabridged version of what is widely known as "buy and hold":

BUY a well-diversified batch of high quality securities through a fundamentally sound strategy that presents the right balance of risk and reward for your family AND HOLD on until you reach your goals.

Whew! That doesn't sound so simple after all. No wonder people just call it buy-and-hold.