Buy and Hold Is Dead
As we start 2011, the optimism in the investor community is widespread.
The talk of double dip recession is forgotten.
Virtually all financial advisors are recommending stocks are again, some hoping for double digit gains.
Only 1% of advisors think stock market will fall more than 10% in 2011.
The siren's song is luring investors back into the market again.
But is it a good time to invest? Should we put all our retirement into the stock market and hope for a repeat of 1980s and 1990s? There is no crystal ball that tells us the future.
But we can note the warning signs.
The common wisdom that we see as the bullish propaganda from brokers and investment advisors is really based on the bull market of 1980s and 90s.
What most investors do not know is that this extraordinary bull market of 20 years has happened only once during the past 300 years.
Betting on it once again has slim chance of success.
Typical return of stock market on the long term is much less glamorous, but a success story makes good marketing propaganda for the financial sector to convince the public.
Thus we are only presented with a short memory, reaching back to 80s when we talk about stock market performance.
Investment calculators typically assume 8% return.
You plug in the number and you compare stock versus bond returns.
You compare rent versus buy decisions.
as if this magical 8% is something that magically happens on the long run.
Nobody warns about decades of lesser returns, or even staggering losses.
Individual investors should not focus on 1980-2000 stock market performance to model their portfolio.
It was a one time wonder.
It never happened for the last 300 years and may never happen.
Today in many measures stocks are over bought.
We have not seen the true stock market bottom back in 2009.
We are at the top of a decades old bubble that is like Tulip mania, South sea bubble.
Earnings are terrible by historic standards.
Dividends are all time low.
We are in a secular bear market since 2000.
This is not the time to buy and hold stocks.
For most people, having treasuries for the last 10 years would be better than owning stocks.
It's all about market timing.
An entire generation of baby boomers loaded stocks in their 401ks.
Everybody hopes to get rich when stocks go up.
An entire population cannot, I repeat, cannot get rich this way.
This is because stock market is a zero sum game.
For every buyer, there is a seller.
When you buy, your neighbor sells it to you.
Stock market does not generate money or value (dividends are negligible).
Let us assume 50 percent of the people sells at the top.
What that means that another 50% will be buying at the top.
This means that HALF of the population will lose big time.
Therefore, a general statement like "now is the time to buy stocks" will not get us rich.
Only few of us will get rich, others will finance those rich people.
You must time the market, and NOT buy and hold like the crowd, since the crowd will be the looser.
For the last 50 years America has borrowed and spent.
This inflated the price of everything, earnings, stocks, salaries, prices, commodities, housing.
Everything.
That is called inflation.
Past stock performance was partly due to this unchecked inflation.
Today, with a deflating money supply, bonds, short sales, and trading stocks must be part of your investment strategy.
Buy and hold is long dead.
The talk of double dip recession is forgotten.
Virtually all financial advisors are recommending stocks are again, some hoping for double digit gains.
Only 1% of advisors think stock market will fall more than 10% in 2011.
The siren's song is luring investors back into the market again.
But is it a good time to invest? Should we put all our retirement into the stock market and hope for a repeat of 1980s and 1990s? There is no crystal ball that tells us the future.
But we can note the warning signs.
The common wisdom that we see as the bullish propaganda from brokers and investment advisors is really based on the bull market of 1980s and 90s.
What most investors do not know is that this extraordinary bull market of 20 years has happened only once during the past 300 years.
Betting on it once again has slim chance of success.
Typical return of stock market on the long term is much less glamorous, but a success story makes good marketing propaganda for the financial sector to convince the public.
Thus we are only presented with a short memory, reaching back to 80s when we talk about stock market performance.
Investment calculators typically assume 8% return.
You plug in the number and you compare stock versus bond returns.
You compare rent versus buy decisions.
as if this magical 8% is something that magically happens on the long run.
Nobody warns about decades of lesser returns, or even staggering losses.
Individual investors should not focus on 1980-2000 stock market performance to model their portfolio.
It was a one time wonder.
It never happened for the last 300 years and may never happen.
Today in many measures stocks are over bought.
We have not seen the true stock market bottom back in 2009.
We are at the top of a decades old bubble that is like Tulip mania, South sea bubble.
Earnings are terrible by historic standards.
Dividends are all time low.
We are in a secular bear market since 2000.
This is not the time to buy and hold stocks.
For most people, having treasuries for the last 10 years would be better than owning stocks.
It's all about market timing.
An entire generation of baby boomers loaded stocks in their 401ks.
Everybody hopes to get rich when stocks go up.
An entire population cannot, I repeat, cannot get rich this way.
This is because stock market is a zero sum game.
For every buyer, there is a seller.
When you buy, your neighbor sells it to you.
Stock market does not generate money or value (dividends are negligible).
Let us assume 50 percent of the people sells at the top.
What that means that another 50% will be buying at the top.
This means that HALF of the population will lose big time.
Therefore, a general statement like "now is the time to buy stocks" will not get us rich.
Only few of us will get rich, others will finance those rich people.
You must time the market, and NOT buy and hold like the crowd, since the crowd will be the looser.
For the last 50 years America has borrowed and spent.
This inflated the price of everything, earnings, stocks, salaries, prices, commodities, housing.
Everything.
That is called inflation.
Past stock performance was partly due to this unchecked inflation.
Today, with a deflating money supply, bonds, short sales, and trading stocks must be part of your investment strategy.
Buy and hold is long dead.
