Weekend Wisdom Stocks have done exceptionally well over the last few years. But the scars of the 2008 crash are still making many investors question their long-held beliefs, including the virtues of buy & hold investing. This shows up in weak money flows into equity mutual funds, which have yet to fully reverse despite the markets strong gains in recent years. On top of this are claims from purveyors of market timing who never tire of reminding us that this investment strategy is no longer relevant to the current uncertain environment. But long-term investing, particularly a buy & hold approach, remains as relevant today as it ever has been. And notwithstanding naysayers claims to the contrary, empirical evidence continues to show the long-term superiority of a buy & hold strategy over any other investing approach. But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are: 1) Buy & Hold Doesnt Mean Buy & Forget Staying engaged with your portfolio is a must. Investing for the long run doesnt mean that you lose sight of developments in your portfolio. The buy & forget mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett. Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into whats happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the buy & hold investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well informed of what is going on with each of their holdings. 2) Dont Fall for the Buy What You Know Mantra Guard against the simplistic beauty of the buy what you know mantra; another one of those skin-deep lessons learned from Warren Buffetts investment style. Adherents of this philosophy load up on stocks from a bunch of companies whose products they use. And then they keep those stocks forever, a la Buffett who has famously hung onto his investment holdings for years. Being familiar with a companys product[s] is a useful, but not necessary, starting point to knowing it as an investment opportunity. The decision to buy the companys stock should follow a thorough, due diligence process that gives you a solid appreciation of the companys prospects, competitive position and the proper value of its stock. In fact, studies show that people have a crippling blind spot when it comes to stocks that they think they know. Too often they will overlook the negatives of the firm because they have fallen in love with the stock. Love is nice in your personal life, but there is no place for passion and emotions while evaluating stocks. 3) Stick With a Plan Avoid haphazardly or randomly filling your portfolio with stocks you like. Always build your portfolio around an investment outlook and stay ready to make adjustments should that outlook change. I am not suggesting here that you need to have an elaborate and explicit outlook for GDP growth in the next quarter or year, but you absolutely need to have a base-case sense for the economy and the markets. If you expect a major economic downturn in the coming 12 to 18 months, your choice of investments would be very different from someone looking forward to a goldilocks-type scenario. And you must stay nimble and flexible enough to adjust your positions should your outlook change. Putting It All Together Please keep each of these pitfalls in mind while putting together your stock portfolio to increase your odds of success. Note that we here at Bradley Wealth have been selectively managing an annual buy & hold portfolio for many years. We construct this portfolio by first taking a look at the economic and earnings outlook. Then we narrow in on the industries that we believe will outperform and stay away from the others. The investment landscape is never easy to navigate, but the situation has become particularly challenging given the uncertain backdrop on the home front as well as abroad. Rest assured, however, that the strategies we have picked for 2015 fully take into account the opportunities and challenges waiting for us in the New Year. We welcome your questions and communications, and we thank you for your on-going confidence. Happy Holidays! Best regards, MB
Posted on: Sat, 13 Dec 2014 14:58:15 +0000
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