Retirement plan decisions made easy
Drill Down: Buy and Hold, or Trade?
The approach we recommend is sometimes called a “buy and hold” strategy. That means you buy the assets you want and just hold them. You’ll do some rebalancing, which I’ll explain later, but not real trading. The opposite of buy and hold is to trade, either daily or less often. Traders are trying to figure out which way the market will move in the short run.
I don’t recommend trading strategies. Sometimes you can make a lot of money trading, but you can also lose a lot of money trading. The research shows that traders do not, in fact, make more money than buy and hold investors. In fact, they usually make less, because buying and selling runs up transaction costs, including commissions.
The problem with this recommendation is that you likely just heard a radio commercial about a trading strategy that makes big bucks with low risk. Maybe my recommendation would be different if I had heard the same commercial, or if I knew your golfing buddy who has made big money trading on the Dogs of the Dow theory, or if I were intrigued by some other trading system.
I’ve heard the commercials, so let’s talk about that first. Suppose that you, yourself, discovered a method that would guarantee high returns. How would you use that information? Here’s what I would do: I’d put my own money into the investment. I’d talk to family and friends about the investment, offering to use my system with their money, for a share of their profits. I’d put all of my effort into raising money to invest this way.
Here’s what I would not do: Hold public seminars explaining my system. I would not make a business based on radio advertising to sell seminars. That’s what a marketing genius does to make a living, not what an investment genius does. In fact, as an investment genius, I’d be afraid that other people would figure out my idea because if everyone tries to buy the investment that I want to buy, I’ll have to pay a higher price because of those other investors. And if I have to pay a higher price, then I’m not going to make 43 percent per year.
As for your friend with a system, many systems have been studied by the academics without a single one of those systems making enough money, over a sustained period of time, to cover trading costs and to earn a return higher than a “buy and hold” strategy.
Your friend is probably not keeping records that allow him to compare his results to a buy and hold strategy on an apples-to-apples basis. That takes a good bit of detailed effort. All of us who are human tend to remember the things that reinforce our beliefs and to forget the things that refute our beliefs. Your friend wants to believe that he’s got a great system. He remembers his wins. He forgets his losses.
Stick with a buy and hold strategy.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
» Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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