A serious question (for once), about the theory of buy and hold and down markets

AirJordan · 03-08-2007, 08:26 AM

Well I'm back, but this time with a serious question

I firmly believe in buy and hold as the only way to beat the market. Like Warren Buffett has said, don't buy any stock you wouldn't be willing to hold for life. My question is concerning down markets however. If we do have a recession, like Greenspan has given us a 1/3 chance, what will you buy and holders do? Do you just ride it out, because the market historically has returned 10% and it will be back, or do you take your funds off the table? I'd like to think we just ride it out, but I'm not sure since I'm much more of a neophyte then most of you sagacious folks! 8)

youbet · 03-08-2007, 08:34 AM

I'm not sure what your question is....... Are you asking whether I got to FIRE by "taking my money off the table" at the bottom and then re-entering the market near the top? If so, well...... no.

DRiP Guy · 03-08-2007, 08:35 AM

Quote:

Originally Posted by AirJordan

Well I'm back, but this time with a serious question

So you are admitting your previous 57 posts were all trolls, but now you are serious?

Yeah, I see.

Quote:

I firmly believe in buy and hold as the only way to beat the market.

When did you come to this belief? Last night? What convinced you? I'm curious.

Quote:

Like Warren Buffett has said, don't buy any stock you wouldn't be willing to hold for life. My question is concerning down markets however. If we do have a recession, like Greenspan has given us a 1/3 chance, what will you buy and holders do?

What do you think most people posting here will do, and why are you interested? If enough people do a certain thing, are you just going to follow the crowd? OR are you going to follow what you said yesterday and actively trade-trade-trade? OR are you going to do what you said in this post and hold no matter what? I am interested.

Quote:

Do you just ride it out, because the market historically has returned 10% and it will be back, or do you take your funds off the table? I'd like to think we just ride it out

No! At -9.236%, you stay in, but at -9.237%, you take it all out and go to MM, until P/E = 8.

Quote:

I'm not sure since I'm much more of a neophyte then most of you sagacious folks! 8)

Yeah, it's clear you are looking to edumacate yourself.

Unfortunately, you may just get a bit more education than you banked on.

FinanceDude · 03-08-2007, 08:46 AM

Quote:

Originally Posted by AirJordan

Well I'm back, but this time with a serious question

I firmly believe in buy and hold as the only way to beat the market. Like Warren Buffett has said, don't buy any stock you wouldn't be willing to hold for life. My question is concerning down markets however. If we do have a recession, like Greenspan has given us a 1/3 chance, what will you buy and holders do? Do you just ride it out, because the market historically has returned 10% and it will be back, or do you take your funds off the table? I'd like to think we just ride it out, but I'm not sure since I'm much more of a neophyte then most of you sagacious folks! 8)

Not to be facetious, but it's "TIME IN", the market, not "TIMING" the market.........

AirJordan · 03-08-2007, 08:48 AM

Quote:

Originally Posted by youbet

I'm not sure what your question is....... Are you asking whether I got to FIRE by "taking my money off the table" at the bottom and then re-entering the market near the top? If so, well...... no.

Sorry I guess I'll rephrase, watching on the money last night got me a little spooked with all the recession talk. I was just curious about the actual theory of buy and hold. This is just so I can sleep a bit easier, and not worry about having to pull all my money off the table.

Buy and hold, is just as simple as it sounds then, buy and never sell until you're going to retire correct? I've heard differing vantage points, so I just wanted a clarification.

FinanceDude · 03-08-2007, 08:56 AM

Quote:

Originally Posted by AirJordan

Sorry I guess I'll rephrase, watching on the money last night got me a little spooked with all the recession talk. I was just curious about the actual theory of buy and hold. This is just so I can sleep a bit easier, and not worry about having to pull all my money off the table.

Buy and hold, is just as simple as it sounds then, buy and never sell until you're going to retire correct? I've heard differing vantage points, so I just wanted a clarification.

I look at it two ways:

1)For my retirement monies (I call it foundational wealth), I make sure I have a diversified portfolio, and let it ride.

2)For my taxable stock accounts, I am more likely to change things up based on current market conditions, I can be 100% stock or 100% cash, I don't feel it's chasing, but more "fun"..........

maddythebeagle · 03-08-2007, 08:59 AM

Quote:

Originally Posted by FinanceDude

Not to be facetious, but it's "TIME IN", the market, not "TIMING" the market.........

but I think the OP needs a "TIME OUT"....maybe a dunce hat for him in the corner...but then again, I aways firmly believed in spare the rod spoil the child....

Nords · 03-08-2007, 09:19 AM

Quote:

Originally Posted by AirJordan

Buy and hold, is just as simple as it sounds then, buy and never sell until you're going to retire correct? I've heard differing vantage points, so I just wanted a clarification.

Yes, AJ, that's the answer for that ingneuous question. Buy it and don't sell it until you need it to pay the ER bills.

A better option might be to stop watching TV and to do your own research. Take a historical portfolio of the last 100 years (or whatever lifespan you choose, I'll use 100 for convenience & lots of data). Look at the effect of being out of the market on the 10 worst days of that last 100 years and see what your portfolio ending balance would be. Don't forget to include transaction costs (admittedly minimal) and taxes (more significant). Market timing sure looks good with this calculation, even with your higher portfolio turnover.

Then re-do the calculation for being out of the market on the 10 BEST days of that last century. In other words, if you're going to engage in market timing then you can't afford to screw it up.

Then consider which scenario lets you sleep better at night. Would it be having your portfolio invested during one of the worst market days, a veritable indistinguishable blip in the long term of compounding, or would it be missing out on one of the best days with its permanent compounding benefit? Is either result a high-enough percentage of your total portfolio value to make it worth the research effort and high degree of accuracy required?

For a really interesting project, see which is more significant in dollar terms-- the effect of being in the market, the effect of being out of the market, or the effect of paying high expense ratios for those alpha-generating active fund managers instead of a few basis points for a low-turnover index fund. Of course if you're letting Buffett be your active manager then you don't have to worry about this step.

Another advantage of doing your own research is that you don't have to argue defensively with posters whose advice differs from your anticipations. Just pick the number you like the best and stop worrying about it.

If the TV program is still running after you finish crunching these numbers, you may want to read Tweedy, Browne's top three research reports on market timing and on beating indexes. (http://www.tweedy.com/library_docs/papers.html) Their "actively managed" mutual funds typically have turnover in the single digits-- stocks are held for periods of longer than a decade. Of course they're not too humble to charge 1.38% for their Global Value fund, and if you want them to manage a personal account they'll do it for a mere 2% per year. They cheerfully admit that they'll underperform the index at least a third of the time, but they don't give refunds.

As for the "fun" comment, I usually change my investments on the condition of the stock-- not the conditions of the market. When I'm ready to have fun, though, it's much more rewarding to do it at Vegas. But I spend most of my time there too at the blackjack table applying probability & statistics to my entertainment "investment" decisions.

Poundkey · 03-08-2007, 09:31 AM

AJ....I'm certainly not the expert here, but at your age (and time horizon) I wouldn't worry about fluctuations in the markets. Build a portfolio with a diverified allocation and just let it ride. Make sure you have enough of an emergency stash in MM so you need not worry about having to sell shares in down markets.
You ask what we would do in down markets. I personally have several years worth of living expenses in "bucket one" so I would keep holding or possibly add shares if prices seemed too good to pass up.
Just my opinion.....

TromboneAl · 03-08-2007, 09:38 AM

You could have asked your question more concisely, like this:

"Does 'Buy and Hold' mean 'Buy and Not-Hold?'"

CCdaCE · 03-08-2007, 09:46 AM

Are you sure you read Four Pillars?

-CC

AirJordan · 03-08-2007, 09:49 AM

Quote:

Originally Posted by CCdaCE

Are you sure you read Four Pillars?

-CC

I guess not, I thought I had, but maybe it just went over my head, oh well I'll stop by B&N today to pick it up.

AirJordan · 03-08-2007, 09:53 AM

Quote:

Originally Posted by Nords

WHOLE POST

Wow, Nords, this may have been one of the most intelligent, clearly-phrased, mini-articles I've ever read. Good to know, I'll just go to bed at night, and take my lumps, and keep riding it out even though the market has made a nice recovery this week, but it doesn't matter either way. Thank you kind sir for the advice.

justin · 03-08-2007, 09:56 AM

Obviously you've been to law school and learned the art of redefining rather plain-meaning phrases into something completely different and at odds with the phrase's original (and obvious) meaning.

Yes, buy and hold means buy and hold. A = A. It is a simple concept.

Buy and hold does not mean buy and not hold. A != !A.

Think about it one step at a time. Let's say the market goes up for a few years and I have a million bucks in my portfolio. Then we have a 20% drop. Do I sell out at $800,000, hoping to get back in before the market goes back up? No! I've already lost the money. In fact, if I rebalance, I'll put more money into stock AFTER they drop to get back to my target allocations. Buy low sell high. It isn't buy high sell low.

Poundkey · 03-08-2007, 10:01 AM

Quote:

Originally Posted by AirJordan

I guess not, I thought I had, but maybe it just went over my head, oh well I'll stop by B&N today to pick it up.

I agree that reading "Four Pillars" would be a very positive thing for any young investor. I'd say it not only gives good investment advice, but also a lesson in human behavior and history concerning the markets. I highly recommend it.

TromboneAl · 03-08-2007, 10:05 AM

Quote:

I'll stop by B&N today to pick it up.

B&N is for suckers. Get it at the library.

AirJordan · 03-08-2007, 10:06 AM

Quote:

Originally Posted by TromboneAl

B&N is for suckers. Get it at the library.

Ahh, the frugal one speaks...

kaudrey · 03-08-2007, 10:49 AM

Hi AJ,

I buy and hold. I buy on a regular basis to DCA, but I had some cash sitting in the brokerage waiting to buy something, so I bought a few days ago. Buy low, don't sell.

I am 15 years from FIRE, so to me a dip is a buying opportunity!

Karen

AirJordan · 03-08-2007, 11:04 AM

Quote:

Originally Posted by kaudrey

Hi AJ,

I buy and hold. I buy on a regular basis to DCA, but I had some cash sitting in the brokerage waiting to buy something, so I bought a few days ago. Buy low, don't sell.

I am 15 years from FIRE, so to me a dip is a buying opportunity!

Karen

Excellent thinking Kaurey, I had an iffy feeling about the market, and after loading up my Roth, I kept hoarding my cash stacks, now the market is looking plenty juicy. Time to buy some more Fairholme, and Janus Contarian. Buy low, and never sell, Brilliant!

03-08-2007, 08:26 AM	#1
AirJordan Recycles dryer sheets Join Date: Mar 2007 Posts: 79	A serious question (for once), about the theory of buy and hold and down markets Well I'm back, but this time with a serious question I firmly believe in buy and hold as the only way to beat the market. Like Warren Buffett has said, don't buy any stock you wouldn't be willing to hold for life. My question is concerning down markets however. If we do have a recession, like Greenspan has given us a 1/3 chance, what will you buy and holders do? Do you just ride it out, because the market historically has returned 10% and it will be back, or do you take your funds off the table? I'd like to think we just ride it out, but I'm not sure since I'm much more of a neophyte then most of you sagacious folks! 8)

03-08-2007, 08:34 AM	#2
youbet Thinks s/he gets paid by the post Join Date: Mar 2005 Posts: 4,337	Re: A serious question (for once), about the theory of buy and hold and down markets I'm not sure what your question is....... Are you asking whether I got to FIRE by "taking my money off the table" at the bottom and then re-entering the market near the top? If so, well...... no. __________________ Over all was the silence of the wilderness - Sigurd Olsen

03-08-2007, 09:31 AM	#9
Poundkey Recycles dryer sheets Join Date: Apr 2006 Posts: 189	Re: A serious question (for once), about the theory of buy and hold and down markets AJ....I'm certainly not the expert here, but at your age (and time horizon) I wouldn't worry about fluctuations in the markets. Build a portfolio with a diverified allocation and just let it ride. Make sure you have enough of an emergency stash in MM so you need not worry about having to sell shares in down markets. You ask what we would do in down markets. I personally have several years worth of living expenses in "bucket one" so I would keep holding or possibly add shares if prices seemed too good to pass up. Just my opinion..... __________________ .....#.....

03-08-2007, 09:38 AM	#10
TromboneAl Thinks s/he gets paid by the post Join Date: Jun 2006 Posts: 4,102	Re: A serious question (for once), about the theory of buy and hold and down markets You could have asked your question more concisely, like this: "Does 'Buy and Hold' mean 'Buy and Not-Hold?'" __________________ - Al -- Always serious, never joking. No, wait. Never serious... Always... I forget.

03-08-2007, 09:46 AM	#11
CCdaCE Full time employment: Posting here. Join Date: Apr 2006 Posts: 579	Re: A serious question (for once), about the theory of buy and hold and down markets Are you sure you read Four Pillars? -CC __________________ "There's those thinkin' more or less, less is more, but if less is more, how you keepin' score? It means for every point you make, your level drops. Kinda like you're startin' from the top..." "Society" - Eddie Vedder

03-08-2007, 09:56 AM	#14
justin Thinks s/he gets paid by the post Join Date: Jun 2005 Posts: 4,010	Re: A serious question (for once), about the theory of buy and hold and down mar Obviously you've been to law school and learned the art of redefining rather plain-meaning phrases into something completely different and at odds with the phrase's original (and obvious) meaning. Yes, buy and hold means buy and hold. A = A. It is a simple concept. Buy and hold does not mean buy and not hold. A != !A. Think about it one step at a time. Let's say the market goes up for a few years and I have a million bucks in my portfolio. Then we have a 20% drop. Do I sell out at $800,000, hoping to get back in before the market goes back up? No! I've already lost the money. In fact, if I rebalance, I'll put more money into stock AFTER they drop to get back to my target allocations. Buy low sell high. It isn't buy high sell low.

03-08-2007, 10:49 AM	#18
kaudrey Full time employment: Posting here. Join Date: Feb 2006 Location: Alexandria, Va Posts: 504	Re: A serious question (for once), about the theory of buy and hold and down markets Hi AJ, I buy and hold. I buy on a regular basis to DCA, but I had some cash sitting in the brokerage waiting to buy something, so I bought a few days ago. Buy low, don't sell. I am 15 years from FIRE, so to me a dip is a buying opportunity! Karen __________________ Two roads diverged in a wood, and I - I took the one less travelled by...