Patience is not always a virtue
Amanda Morrall - The Press | 3 September 2009
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Buy and hold. It is a well-worn mantra in the investment community but recent experience has some questioning how well it holds up under pressure. AMANDA MORRALL investigates.

How many times have you heard it? "It's time in the market, not timing that matters." It is the basis of modern portfolio theory and a refrain uttered by financial advisers with the same frequency as Jingle Bells at Christmas.

It is a convincing argument in the face of evidence that all but the most shrewd and skilful investor will rack up more losses than gains moving in and out of the stock market trying to get it right.

Yet recent experience has proven the patient investor does not always reap the rewards. After all, those who dutifully held to the financial philosophy were among some of the hardest hit by the 2008 market meltdown which saw portfolio values sheared by as much as 30 to 40 per cent.

Younger investors with time on their side may be in a position to recoup the losses. However, baby boomers without the added security of a regular pay cheque are not as fortunate.

Investors are not the only ones questioning whether buy and hold is overblown as a strategy.

Michael Lang, chief investment officer with NZ Funds, makes the heretical suggestion that it is a strategy that benefits the investment industry more than its clients.

The industry, he says, has amassed incredible wealth "out of getting people's money and keeping it as long as possible".

In early 2008, the total value of mutual funds worldwide (pooled money under the control of fund managers) was tagged at $26 trillion.

"The revenue structure of our industry is a fixed fee per annum regardless of what happens, so little surprise that the investment advice is: 'Buy and hold and the longer you hold the more certain the outcome that you will be successful'."

For obvious reasons, it is not a popular or common view in the industry but Lang is not alone in his criticism.

American financial guru Robert Kiyoski delights in disparaging buy and hold as an investment strategy. He calls it a "sales pitch" concocted by the mutual fund sector.

The billionaire is no shrinking violet when it comes to selling and marketing his own patented financial products but his bearishness may not be without reason.

If his prediction rings true about millions of baby boomers rushing to liquidate invested retirement funds to supplement fast depleting thin government pensions, it could have a crushing effect on the already badly damaged markets.

It is all the more reason to question the wisdom of putting one's money into the market and leaving it there long term, come hell or high water.

Janine Starks, investment manager with Liontamer, says for the vast majority of investors, buy and hold is a sound strategy with a predictable pay-off. She likens it to a flu jab.

"It's good for your health and it'll keep the lurgy of losses at bay."

She says amateur investors acting on their own inevitably panic at the first hint of a big downtown, pull out and then miss out on good opportunities for re-entry.

She says capital protected funds (Liontamer's specialty) are designed to save investors from themselves by locking them in for a fixed term. At the same time, they have the added comfort of knowing they'll get a full return on their money (with or without added returns), in all but the most extreme circumstances.

Typically, the capital protection, an insurance policy of sorts, collapses if the markets fall below 50 per cent of the point of entry.

Starks admits buy and hold is not a one- size-fits-all strategy and is particularly ill- suited with respect to smaller companies or riskier stocks where a quick exit may be required. But used in combination with other investment strategies, buy and hold has a valid place and role, she maintains.

"For most investors, the best thing to do is purchase funds from a professional fund manager and hold these over the medium to longer terms (5-10) years. That manager will be implementing a wide range of strategies inside the portfolio. With some shares they'll be buying and holding, others they'll actively trade a bit more as they see points or under and over valuation."

Most financial planners point to 10 years as a realistic and reliable period in which to capture healthy long-term rates of return.

But Lang says the historical performance of stock markets disproves that theory. In tracking the performance of markets since the early 1900s, an alternating pattern of bear and bull markets is evident in 20 and 10 year stints respectively. Lang says that's been the case since 1900 up until 1980-2000 which enjoyed an unprecedented 20-year bull market giving a distorted picture of deliverable returns.

"The broader picture is that we enjoyed this period of phenomenally higher returns so when you sit down with an adviser, or if you go to a lecturer, they say the expected rate of return from equities is 10 per cent but this is a mythical rate of return and no- one ever questioned, 'How long, how is it calculated, what does it look like?"'

Lang maintains that current assumptions about stock market performance are based on the experience of corporations, endowment funds and industrialists, for whom 10 per cent long-term returns are more achievable because they invest for double, even treble, the typical retail investor.

Modern portfolio theory, he says, does not accurately reflect the circumstances of retail investors who have come to make up a bigger stake of the investment sector's dollars.

"If you're a mum and dad investor, more of whom are having to provision for their own retirement as the state steps away from doing that, they're becoming a bigger component of the equity markets and for them, I think a fair and sensible timeframe is somewhere between 20 and 30 years."

Financial planner, columnist and best- selling money writer Martin Hawes is a bit more forgiving towards buy and hold.

"I don't think it's a fund manager trick to make sure people give away their money. Research would show a lot of people get tactical asset allocation wrong."

As an educated investor, Hawes says he employs "tactical asset allocation" (buying company stocks that have good value for a good price), but he doesn't recommend it for everyone. That's because the average investor does not know what, when or where to invest.

"My mantra is buy in gloom and sell in boom but most people do the opposite because they are driven by emotion and what markets are doing at the time. So people often join the stampede to rush out of the market at exactly the wrong time, when they should be buying, then when markets are booming, that's when people tend to join the stampede and start buying at the top of the market."

For that reason, he says buy and hold is a good strategy, but again mainly for those with time on their side.

"I think for young people buy and hold works . . . as far as the baby boomers go, most of them should be starting to reduce their risk anyway, which means they shouldn't hold the same quantity of volatile assets, like shares and property, that you did when you were younger."

So where does that leave the more mature investor who wants to see better returns in a low interest rate environment where cash at the bank is a losing long-term proposition due to inflation?
Hawes believes there is still room to retain equities in one's twilight years, as long as they are well chosen.

Lang sees three alternatives to buy and hold:

• Don't buy shares
• Go for capital protection or a comparable strategy that protects against dramatic downturns
• Timing the market; going with active managed funds.