There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.
There are an increasingly amount of ‘experts’ extolling the underperformance of international and small equities for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.
These ‘experts’ are using 2014-2016 and into 2017 as a sales gimmick. You will hear ‘look I would not have as much small stocks’ or ‘international stocks will underperform for some time to come’. Or both.
Many of us have short memories. In the late 1990’s U.S. Large Cap Growth stocks including tech stocks were out performing nearly all other assets classes. Like Large Value, small stocks, international stocks.
Most ‘investors’ or should I say speculators had portfolios concentrated in U.S. large cap growth stocks. Specifically, tech stocks or ‘dot’ com stocks.
It was said that it was a new paradigm. Things had changed, permanently, they said. Small stocks, value stocks and international stocks were no longer relevant, they said. Fed chairman Ben Bernanke had the famous quote ‘irrational exuberance’. This only slowed the market for a short time.
Then in 2000 the tech bubble burst. U.S. Large cap growth stocks were crushed.
Warren Buffet who had lagged the tech stock market badly during the 1990’s was back.
A globally diversified portfolio saved many investors. While the speculators were left picking up the pieces.
Investors think long term while speculators think month to month.
True investors are much better served using a free market strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success.
It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’. ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.
When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.
When we control risk in our portfolio we can look to our future with confidence. The ‘all-in’ attitude will lead to disappointment over the long term.
To be successful, investors, no matter how large, would be far better off using a free market strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory.
Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work. Most importantly we must believe in our strategy and remain disciplined.
We must own equities….. globally diversify ……. rebalance.