Another Buy-Hold Myth: You Don’T Want to Miss the Rebound
My top recommendation for over-fifty investors? Steer clear of the buy-hold philosophy: Have an exit strategy. Buy-holders are critical of defensive strategies. They say if investors get out of the market, they won't be invested when the market rebounds and they'll miss those returns.
As with many myths, there is some truth in what they say. Exit strategies aren't perfect. They can produce €false alarms,€ and yes, if you follow your exit strategy, you could be out of the market when it rebounds. My firm had a false alarm in 2010. The financial environment was grim: The BP oil spill had created havoc, Europe was in crisis, and foreclosures were at record highs. It looked like we were headed for a recession. The risk was enormous. I advised clients and the listeners of my radio show to get out of the market. Then the market rebounded and we missed the returns. Granted, that's not good. But more importantly, the investors who took my advice still had their principals.
Most of my clients are retired or near retirement. Protecting their principal is my number one job (and if you're over fifty, I recommend it be yours, too). A defensive strategy, even when it doesn't allow you the returns you might have made, protects that principal. Think of it this way: You may want to go play outside, but if a tornado warning goes off, you find shelter instead. I'd venture to say that most of you have never been hit by a tornado, that most of the warnings have been false alarms when it comes to your personal safety. But do you ignore the sirens? You could play outside and get better returns on your life enjoyment, but you take shelter because you know that just one tornado could destroy your life. One bear market could destroy you, too, robbing you of an average of thirty-seven percent of your life savings. An enormous loss like that can change your life, especially if you're retired.
By sticking with the buy-hold philosophy, you may put your retirement at risk. You have to choose: would you rather miss a market rebound, or would you rather take shelter and protect your life savings? I would rather miss the occasional return than risk losing thirty-seven percent (or more) of my money. Yes, it's a trade-off, and for investors over fifty, I think it's a good one.
As with many myths, there is some truth in what they say. Exit strategies aren't perfect. They can produce €false alarms,€ and yes, if you follow your exit strategy, you could be out of the market when it rebounds. My firm had a false alarm in 2010. The financial environment was grim: The BP oil spill had created havoc, Europe was in crisis, and foreclosures were at record highs. It looked like we were headed for a recession. The risk was enormous. I advised clients and the listeners of my radio show to get out of the market. Then the market rebounded and we missed the returns. Granted, that's not good. But more importantly, the investors who took my advice still had their principals.
Most of my clients are retired or near retirement. Protecting their principal is my number one job (and if you're over fifty, I recommend it be yours, too). A defensive strategy, even when it doesn't allow you the returns you might have made, protects that principal. Think of it this way: You may want to go play outside, but if a tornado warning goes off, you find shelter instead. I'd venture to say that most of you have never been hit by a tornado, that most of the warnings have been false alarms when it comes to your personal safety. But do you ignore the sirens? You could play outside and get better returns on your life enjoyment, but you take shelter because you know that just one tornado could destroy your life. One bear market could destroy you, too, robbing you of an average of thirty-seven percent of your life savings. An enormous loss like that can change your life, especially if you're retired.
By sticking with the buy-hold philosophy, you may put your retirement at risk. You have to choose: would you rather miss a market rebound, or would you rather take shelter and protect your life savings? I would rather miss the occasional return than risk losing thirty-seven percent (or more) of my money. Yes, it's a trade-off, and for investors over fifty, I think it's a good one.
