Why investing long-term without a strategy can be a deadly mistake

Many of you might be familiar with the Buy-and-Hold strategy. It is popular as a ‘go-to’ strategy amongst investors — you just need minimal effort and still profit from the investment, so why not?

However, there’s more to the strategy than literally buy and hold for it to be a good one.

Have you ever been in situations like these?

If you feel that something is amiss in your buy-and-hold investment strategy... highly likely there is something not right somewhere.

Read on to find out why the Buy-and-Hold strategy is more than just — buy and hold — for it to be an effective strategy for your retirement. And it can’t be done blindly.

At The Money Folks, we help our clients invest and build multiple income streams - potentially enabling them to achieve early financial independence. Reach out to get your wealth growth roadmap today.

Disclaimer: This post represents our personal views and opinions and is neither associated with any organisation nor reflect the position of any organisation. This content is also only for informative purposes and should not be construed as financial advice. Past performance does not necessarily equate to future performance. Please seek advice from a Financial Adviser Representative before making any investment decisions.

1) Buy and hold blindly may mean missing other growth opportunities

So many of our friends had shared that they buy security (stocks, bonds, or whatever it may be) and they just forget about it. Hoping that after a while, they will reap positive investment returns. To put it simply, they may be investing blindly.

While it may give you some returns, it might not give the returns that you need. Or worse, it may give you negative returns where you are in a worse position from before you started investing. (Yes, it is possible to lose even over the long term!)

Did you know that even the S&P 500 — which consists of stocks with the largest market capitalisation in the U.S. — may experience losses too?

For illustration purposes only. Past performance is not necessarily indicative of the future or likely performance of S&P 500. Source: Finviz.com

The decade from January 1999 to December 2009 had been referred to as The Lost Decade by investors who had invested in the S&P 500. The index effectively reflected negative annualised total return during the 10-year period.

This goes to show that even the stocks with the largest market capitalisation in the U.S. do not guarantee positive returns for a long-term investor, (given that you entered the index from 1999 until 2009).

Although the S&P 500 is known to be indicative of the general US stock market’s performance, there are actually other sectors and geographical locations that may also offer investors growth and value.

For instance, the Hang Seng Index (HSI) fared well with +28.9% compared to the S&P 500 with -0.95% during 1999-2009.

For illustration purposes only. Past performance is not necessarily indicative of the future or likely performance of the HSI. Source: Hang Seng Indexes

If one had invested blindly into the S&P 500’s securities from 1999 and was retiring in 2009, they might have found themselves dumbfounded with much less retirement funds than expected.

A savvy investor would have considered other market opportunities as well to invest in rather than putting their eggs only in one basket for retirement. Especially if you are investing for the long run.

2) Will you continue to hold even if you make 80% losses?

With inflation at a 40-year high and interest rate hikes, investors have been dumping their growth stocks since the start of this year. Shares of high-growth tech stocks have plunged dramatically.

The NASDAQ Composite Index even fell by around 18% from November 2021 to April 2022.

If you have invested in tech funds, will you still continue to hold, thinking that you will recoup your losses eventually?

Loss recovery is not something definite and usually, it takes a significant amount of years to do so. Even over time, you might barely break even from the loss.

Some might not realise this, but here is how much you will need to gain to recoup the capital loss from your investments.

If you lost 50% of your capital from a financial instrument, it will need a 100% gain to recover from the loss. What if you lost 80% of your capital — would it be realistic for you to gain at least 400% returns on your investment?

Even if it did, how much time will it take to achieve 400% returns?

If we look at the Japanese stock market, it has not gone back to the same level as in 1989 even in 2020 (that’s almost 3 decades and counting).

For illustration purposes only. Past performance is not necessarily indicative of the future or likely performance of The Nikkei 225. Source: Finviz.com

Would you continue buying and holding? What if you only have 10 years more to spare?

And while holding on to these losses, what other opportunities are you missing out on the market?

3) Buy-and-hold blindly means your portfolio may not always be aligned with your risk appetite

Over time, your portfolio might change in asset composition. And this might pose unnecessary risks to your portfolio.

This is because different financial assets perform well in different periods of time.

For example, let’s say your original target allocation is meant to be as below:

For illustration purposes only.

But over time, each asset class may generate a different percentage of returns, which results in changes to your portfolio allocation:

For illustration purposes only.

Since the stock market performed significantly well compared to other asset classes, you can see that the asset allocation slowly shifts to becoming more heavily weighted in stocks by 70%. This actually makes you more vulnerable to the volatility of the stock market.

While it is good that your stocks had generated positive returns, adjustments could be made to manage the risks of a portfolio. This would minimise any potential downsides that are not aligned with your risk appetite.

In the event of a volatile market, your portfolio needs to be rebalanced in terms of asset composition to protect your wealth from any valuation crash and ensure losses are within a palatable range.

Imagine if your risk tolerance is up to 20% losses. If your portfolio is left unbalanced, and if the stock market plunges, what if you end up losing as much as 35% of your portfolio?

That’s 15% more than what you can bear.

Depending on the prevailing market, the asset composition of a portfolio needs to be adjusted accordingly to match one’s risk appetite. If you hold equities bought during a volatile market condition, it’s important to rebalance the stock composition to protect you from losing more money than what you can tolerate.

Did you know that your investment portfolio needs regular monitoring and rebalancing not just in asset classes but in geographic and industry sectors as well?

4) Buy-and-hold for the long-term works if everyone is a rational investor

Did you know that the average investors can only hold up to 3 years?

According to Dalbar’s research on investors’ behaviour, humans are generally loss averse. Thus, we may not be able to stand the long period of the buy-and-hold strategy. The research shows that the average investor typically only lasts 3 years of buying and holding.

And there is nothing wrong with this! It just goes to show that this strategy is actually counterintuitive to most of us, as we are human after all.

Naturally, we will react to danger or pressure — this is our fight or flight response.

Facing a market crash and having to lose more than half of your net worth is gut-wrenching and just does not feel right not to do anything.

If we are investing as part of our retirement planning, this situation most likely will lead us to regret our decision of buying and holding. Imagine if it’s a prolonged bear market – it would be a stressful situation to be in and your investment effort will be in vain.

As we are investing for retirement, it is totally okay to cut the losing asset as it might require quite some time before it can recover (if it ever does!).

So, instead of buying and holding blindly, here is what you should do:

1) Establish your financial goals and do regular rebalancing

First thing first, set a clear goal you want to achieve for your retirement. For example, if you realise that you need $800,000 in order to retire comfortably, strategise and work towards it.

Find out how much returns you need to achieve your goals – is it 8% p.a or 10% p.a? Identify which assets can potentially give you your expected returns.

With a specific goal in mind, your investment journey becomes clear. This will help you in your investment decision-making as you are working towards it.

So that in any market condition, you are able to know what are the actions required in order to achieve your objectives.

Do you need to adjust your portfolio in terms of asset allocation?

Do you need to diversify into other sectors and geography?

And the analysis goes on.

Monitor and keep an eye on your portfolio’s performance. Adjust the asset composition and industry exposure accordingly to the prevailing market condition in order to optimise your portfolio returns.

This way, you will not lose out on opportunities and waste a significant amount of time by blindly buy-and-hold into an investment.

If you want to make the most of all your time and opportunities in the market, it is best to work with a professional to grow your wealth.

2) Diversify in your asset allocation to manage risks

While you rebalance your portfolio, be sure to diversify the assets that you invest in as well as the sectors that they are exposed to. This is to protect you from the downside risks that come with your investment.

You need to look at your investment portfolio as a whole – this includes not just Exchange Traded Funds (ETFs) or unit trusts but any other financial instruments or asset classes that you have invested in. For example, property, your own business, commodities and many more.

This is where proper asset allocation comes in and it should go hand-in-hand with your risk management strategy.

Diversification is key to protecting your capital from excessive losses.

Asset allocation also needs to be adjusted according to your phase in life. Maybe for the first 10 years in your 20s-30s, you are looking for aggressive growth, hence you would prefer to invest in growth stocks.

But when you are close to retiring, you may want to take less risks and prefer to have an asset allocation that allows you to get regular passive income and is less volatile.

3) Understand the asset valuation and sectors you are investing in

Do your own due diligence before investing especially when you plan to buy and hold for a significant amount of time.

Thorough research is very important — you may review the company's fundamentals and their viability in the long run. What are their plans to continue increasing earnings and stay relevant in this ever-evolving market?

On top of that, to understand whether the entry price is fair, you will need to know how the economic stages may affect the asset’s performance in the long run. Will it potentially bring more value to you over time?

The rotation of the economic sector is constant – understand that every asset class performs differently at different periods due to the impact of macroeconomic changes.

Here’s what we mean by the economic sector rotation and the asset classes that perform well during each period:

For example, in an economic recession, the consumer staples sector is usually favoured as people are willing to pay for food and living needs even in an economic downturn.

But as the pandemic proved that nothing is ever certain, the sector rotation would for sure change and reshuffle based on the prevailing economic situation and relevance. Be sure to keep track of the latest economic and market updates.

Not sure how to maintain a sustainable and effective buy-and-hold strategy for your investment?

The buy-and-hold strategy is actually one of the most practised long-term strategies amongst investors, and it reaps fruitful returns when done right.

However, it should not be done blindly. While buying and holding, the above points need to be taken into consideration so as to potentially optimise your gains and minimise your losses.

If you need a helping hand to optimise your investment returns, we are here to assist you every step of the way in your investment journey.

The majority of our team is recognised as the top 5% of financial advisor representatives worldwide, and our clients are on track to potentially achieve their retirement goals 10-15 years earlier than planned.