The Pain in the "Buy and Hold" Strategy

Posted by Patrick Ceresna on Oct 27, 2016 2:15:13 PM

Ceresna Comments: The mainstream wealth management firms and the advisors that represent them firmly stand by the “Buy and Hold” mantra.  This stance is firmly entrenched in modern portfolio theory.  The idea that risk can be diversified away by owning a basket of uncorrelated assets.  These models are anchored in the world of academia.  This is the same world where negative interest rates and efficient markets make sense.  The problem with models is that they must make assumptions to be able to be able to be computed.  The problem is that these assumptions are unknowable and dynamically changing.  The truth is that the markets adhere far more to behaviour finance than fundamental rigor.  Investors are risk adverse and losses hurt.  When investors endure losses, they lose the appetite to stay the course and often seek change or to stem further loss. 

Losses Hurt More Than Gains

by Adam Taggart
www.peakprosperity.com

As biological organisms, humans are motivated by pain and pleasure.

But interestingly, while we tend to think of these as equal motivators, they aren't. We humans are wired to be more risk averse than pleasure-seeking. As the works of Nobel recipient Daniel Kahneman explained:

Humans may be hardwired to be loss averse due to asymmetric evolutionary pressure on gains and losses. For an organism operating close to the edge, the loss of a day's food could amount to death, while the gain of an extra days food could lead to increased comfort but (unless it could be costlessly stored) would not lead to a corresponding increase in life expectancy.

And through the related findings of Prospect Theory, we actually know how much more we hate losses than we like gains. About twice as much:

prospect-theory.png 

The short video below uses these insights to deliver a simple message: In today's over-inflated, over-leveraged, over-manipulated markets, why on earth would a rational person not be prioritizing protecting their financial wealth?

Given the outsized risks, as well as our natural programming to feel losses more severely, pursuing incremental gains at this point is downright dangerous if one doesn't already have a contingency plan in place for a market downturn.

While most PeakProsperity.com readers already appreciate this message, there are many people out there who are still simply following the herd. We created this video for each of you to share with anyone you know who might benefit from a brief but direct "wake up call". Please take a moment to share it, and let us know any feedback you receive.

Source: Zerohedge.com
by Tyler Durden
http://www.zerohedge.com/news/2016-10-26/buy-and-hold-chart-your-wealth-manager-does-not-want-you-see

The "Buy and Hold" narrative spewed by every asset-gatherer and commission-taker is perhaps far better understood as "buy and hold on tight" as the following chart shows, for many, equity exposure is simply inappropriate (or too scary)!

20161026_cash_0.jpg 

Simply put, it's not the 'volatility' that people see as risk... it's the drawdown, and as SocGen's chart above shows that drawdown is practically impossible to bear unless you are lucky, blind, or ignorant.

Add to that the fact that US valuations have seldom been more expensive...

20161026_cash1_0.jpg 

In today's over-inflated, over-leveraged, over-manipulated markets, why on earth would a rational person not be prioritizing protecting their financial wealth?

Ceresna Comment: Can you endure a 25-55% drawdown and stay the course like the chart above illustrates? If not, you should be learning how to remove the outlier risk of loss with options as an important wealth preservation tool. 

 

Topics: buy and hold

Subscribe to Email Updates

Browse by Tag

Follow Me