Investing - Seniors - Beware of Buy and Hold Investing
If you are retired or near retirement, you need to understand a major weakness of the popular Buy and Hold strategy of investing. Read on to learn what it is and how you can protect yourself.
For years we've been told that the only safe way to invest in the stock market is to 'Buy' quality stocks or mutual funds and 'Hold' them for the long-term. This strategy may work well for someone in their twenties or thirties, but it has the potential to severely impact those in or near retirement who depend on their nest egg for income.
Barry retired at age 55 with a healthy $750,000 nest egg. That would have been more than enough to provide for him and his wife, allow them to travel and to live their retirement dreams for the rest of their lives. Unfortunately, Barry made the mistake of following the advice of his previous broker who touted the Buy and Hold strategy of investing (B&H).
You see, B&H says that there isn't any way to 'time the market'. It also says that if you are not invested for even a handful of days over a 10 year period, that it can significantly reduce your return. Therefore, it's reasoned, you should stay invested and just 'weather' the difficult periods when the market declines in value. "It will come back, just hang in there," its proponents argue.
This defies common sense. It's like telling one of my daughters to wear her bathing suit all winter and to stay outside by the swimming pool, because the hot weather will come back next year!
Barry found this out the hard way. After 3 years of staying out in the cold his $750,000 retirement savings were only worth $350,000. His and his wife's dreams of traveling and enjoying a comfortable retirement were gone. He has been forced to go back to work, hoping to retire again in 4 years.
The reason that B&H doesn't work well for seniors is because it assumes you have the time to recover from a severe market downturn. But few realize the implications of this belief.
For instance, if you invested $100,000 in the S&P 500 index on January 3, 2000 it would only be worth $62,626 on December 31, 2002, three years later. That's a loss of almost 38%. "But hang in there," the B&H strategist says. "It will come back."
Well, let's look at that. Assuming a constant 10% annual return, it would take an investor almost 5 years to recover what was lost. A constant 7% annual return would require 7 years to reach $100,000.
So the B&H investor would have to forgo any income or use of that money for 8-10 years and still would only have their original investment! Are you willing to leave your money untouched for 8-10 years and come away with the same amount you put in? I doubt it. That's why the B&H strategy can be dangerous.
I believe strongly in investing in the stock market. Even someone who is retired should have a portion of their money protected against rising prices-something the stock market does well. It is vital, though, that seniors employ certain safeguards.
To keep from repeating Barry's mistake, you need to determine the maximum amount you are comfortable losing. For instance, if you are investing $100,000 perhaps you set a 'floor' at $90,000. If your portfolio declines in value to the floor amount, you take action. That way you know you only have 10% of your portfolio at risk
The second point is to make sure this 'floor' rises as the value of your portfolio rises. If your portfolio goes up 15%, you'll want your floor to increase 15%, too. This will help you lock in your gains along the way.
If the value of your portfolio approaches your 'floor', determine why. Then sell the investments that are the cause of the drop and reallocate that money somewhere else, based on your situation, risk tolerance and what's going on in the market and economy.
Find out more about the dangers of the Buy and Hold strategy of investing and the steps you can take to protect yourself by visiting www.guardingyourwealth.com or by calling 1-877-827-1463.
Mr. Voudrie is a Certified Financial Planner and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN.
Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He'll answer your financial question - FREE at http://www.guardingyourwealth.com 
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