Should you avoid Buy-and-Hold?

Below article is the continuation from the last post - What ANIMAL are you in the stock market? - taken from Bo Sanchez' book The Turtle Always Wins.

This time, we'll learn about the ""Typical Investor" which basically covers those investors following a Buy-and-Hold strategy, represented by the animal Sloth.

Photo credit

At the end of this post, you'll also find out some inherent weaknesses of this strategy and how to address these limitations.

***

Sloth is an animal that sleeps 16 hours a day.

That's why I picked Sloth to represent the Typical Investor.

His main strategy? Buy and hold.

The Sloth Investor parks his money in a stock or mutual fund - and forgets about it. Usually, it's a huge amount of money.

Let me introduce you to Eddie.

When Eddie was a little boy, his mother taught him how to save in a piggy bank. When he grew up, he never forgot this lesson. At the age of 31, Eddie was proud to have P500,000 safely kept in a time deposit in a bank.

But one day, he read my book, 8 Secrets of the Truly Rich. In that book, Eddie learned about the world of mutual funds.

Eddie learned why he shouldn't put long-term investments in the bank. He learned that whatever little interest the bank gave, it would be eaten by a monster called inflation.

Inflation means what you can buy with P1.00 today, will cost you P1.05 by next year. Because the purchasing power of money decreases over time.

So Eddie called up a huge mutual fund company. He learned that there are generally three types of mutual funds: equity fund, bond fund and balanced fund. 

That week, Eddie plunks in P500,000 into the equity fund.

And he forgets about it. If it grows at 12 percent a year, in 30 years, when he's 61, Eddie's P500,000 would have become P15 million.

Not bad, right?

Eddie is the Sloth. He's your Typical Investor. Or what you call a but and hold investor. He buys and holds stocks for the long haul.

It's a good strategy.Not the best, but good enough.

Do I recommend it?

Only with certain conditions.

First Condition: Obviously, you need to have a sizable chunk of money to do this.

Second Condition: You need to buy a basked of great companies that you believe will be great for the next 20 years.

Third Condition: You have to buy when the market is down or flat. 

You see, the stock market is like a roller coaster. If Eddie invested his P500,000 at the "peak" of that roller coaster, his earnings would be much lower.

Fourth Condition: You have to reinvest the dividends.

If you reinvest the dividends, that's like adding to your investments over time, which is a bit like the Turtle Strategy.

The solution to the inherent problems of the Buy-and-Hold Strategy is the Turtle Strategy.

What's that? 

I'll explain it in more detail in the next chapter, but here's a sneak preview: 

If Eddie invested his P500,000 in the equity fund and it grew by 12 percent a year, he'd have P15 million after 30 years. But if he added P5,000 each month for the next 30 years, he's end up with P31 million!

Stock prices don't climb up in one smooth line. It climbs up in a jagged line, going up and down like the peaks of a rocky mountain range.

And some giant companies, because of unexpected turn of events, don't climb up at all.

But if you follow the Turtle Strategy, you'll still earn.

****

In our next post, you'll find out why the Turtle (Trained Investor) beats Sloth, and why Turtle can beat the Rabbit (The Trained Trader). You'll also learn the lifestyle principles of a Turtle investor you can follow.

Hang around for that future learning!

Have fun investing (with training),
Omeng

PS: You can also read this short account of Bo Sanchez sharing his actual experience of this Buy-and-hold thing. Click here to find out his reasons why he's not a fan of being a Sloth/Typical Investor.

 
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