Curried Wealth Building
Finding an Edge

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The Myth of Buy and Hold

Wall Street is a business. Businesses exist to make a profit. Profits come from paying customers. Customers receive a benefit for monies paid…..except on Wall Street.

Wall Street is a marketing MACHINE. The Journal of Consumer Affairs reports that the mutual fund industry alone, spends over ½ a trillion dollars a year trying to entice investors (customers) to place money into their care. This is done with slick magazine ads and television commercials. These typically show outstanding results over the last 5 or 10 years. These ads are typically misleading for a couple reasons.

First, the mutual fund company publishing the ad has dozens, maybe a hundred mutual funds to choose from. Which fund do you think they are going to use? Perhaps the best performing one? Absolutely. You won’t hear about the mutual funds at this firm that were merged or even abandoned. Secondly, they also have great flexibility in choosing the PERIOD of performance. I can take the past 5 years performance of an investment and make it’s performance look much better just by cherry picking the start and end times for the measured performance.

Next time you see a performance ad notice that the period of performance will start and end mid-year. It almost never starts on January 1. This allows them to make the returns seem larger.

Wall Street does NOT make money when the stock market goes up. They make money no matter what. Market up, they make money, market down, they make money. This is because they make money from FEEs, not directional movements of the market. Their biggest fear is that you take your money out and put it somewhere else. This is why they promote buy and hold. If you were to sell at times when the market looked a little giddy and too high, then you might just go ahead and withdraw it from the account. Can’t have that, can we?

Think of the stock market as roller coaster. There are long cycles where you are going up the hill (the bull) followed by long cycles where the train goes down the hill (the bear). The following chart shows the major cycles over the last 100 or so years for the S&P 500. 

Although this chart stops at 2003 it is clear that a buy and hold strategy is just plain stupid. These cycles last on average 15 years. The current bear cycle is only 9 years old and therefore will probably run to at least 2012-13. The down periods all showed returns that were less than just investing in government treasury bills.
Let’s look at the last ten years:

Wow, that’s fantastic long term investing. My "buy and hold" pot is down after ten years. I thought stocks were a sure thing? NOTHING is a sure thing and you can darn well guarantee that doing the same thing as everybody else will NEVER make you wealthy. Mathematics won’t allow it. So the next time you hear someone talk about buying for the long term, you can be sure he gets his bread buttered by taking a little bit off the top of your account every year.

There’s an old story, which I’ve seen many places on the net and there is even a book with the punch line as a title, it makes my point beautifully:
"In 1885, William R. Travers, prominent New York businessman and builder of Saratoga Race Track, was taken out for lunch by a Wall Street broker anxious to impress him and win his business. The broker took Travers to a nearby marina to show off his yacht and those of the other brokers who worked for his firm. The businessman looked down the line of beautiful craft and asked, "Where are the clients' yachts?" There was no answer."

Brokers don’t care if you make money. They never have and they never will. It’s all about the fees. YOU, are the only one that cares if YOU make money. Take responsibility and learn what’s going on with your finances. That is the only chance you have to do well in the long run.