If you feel the stock market has been turbulent the last couple of years, you would be right. Consider these facts from the summer of 2014 (Source: InvestingHaven.com, July 2016):
- Crude oil went through its sharpest correction ever, losing more than 70% in 18 months.
- The dollar rally was the sharpest in many decades.
- Stock markets went through three flash-crashes never seen before.
- Many individual stocks lost between 50% and 70% of their value, as stock indexes remained close to all-time highs.
During what we think of as normal times, stocks increase over time with slight market corrections. But in the last few years, central bank policies have disrupted normal market behavior, which has caused some difficult market conditions. Some call it a whole new world of investing. So, does a buy and-hold investment strategy make sense in these times? There are various views on this; but the consensus seems to be that it still works, although you may need to do it differently than in the past.
There are several advantages to buy-and-hold investing:
- Fewer commission because you are not trading as often.
- Tax benefits as the IRS taxes long-term gains at a lower rate.
- People feel less likely to get out of the market during periods of turmoil.
- Not needing to pay attention to the market as much by sticking to the strategy.
The last point is exactly what is different about today’s buy-and hold strategy. You still need to keep an eye on your strategy. The new requirements for a successful buy and-hold strategy include:
- Only consider buying stock in best-in-class companies with a decent track record for growth.
- Hold a diversified portfolio so you are not subject to the risk of an individual company.
- Be ready to get out of any stock once it falls 10% or more from the price you paid.
- Rebalance your portfolio on a regular basis by scaling back portions of your buy-and-hold portfolio that do better than other parts.
- Get rid of investments that no longer meet your needs. If you put the portfolio together when you were in your thirties and are now in your fifties, your objectives and risk tolerance have probably changed.
At one time you could feel comfortable that your long-term buy-and-hold strategy would be relatively smooth with solid returns. However, the up-and-down market is now taking your portfolio for a bumpy ride that could result in significant losses. The bottom line is that we are in different times, and you have to be diligent about watching your investments.