Passive And Buy-And-Hold Investing Doesn’t Work Unless...

General Electric (GE) Earnings and Price Correlated Graph Followed With Performance

CenturyLink Inc. (CTL) Earnings and Price Correlated Graph Followed With Performance

The following FAST Graphs Analyze Out Loud Video elaborates on the points expressed in this article:


The main premise behind this article was to illustrate how the general arguments regarding whether buy-and-hold is a good strategy or not are frankly ridiculous. The validity of buy-and-hold as a sound investing strategy is predicated on many factors. Some of the primary ones are what you buy-and-hold and the price at which you buy-and-hold it at. As the examples above illustrate, you can’t just buy-and-hold anything, furthermore, you can’t just buy it at any price either. For buy-and-hold to truly be an effective strategy, it must be done right. However, when done right it is a terrific way for people to invest their capital.

A secondary premise behind this article was to illustrate the profound and fundamental difference between true investing and speculating. Buy-and-hold is an investing strategy that implies the appropriate holding time period, which is a hallmark of any strategy called investing. Speculation on the other hand is usually associated with shorter time frames where some element of arbitrage is applied. Whether speculators will admit it or not, there is more risk associated with this tactic than there is with sound fundamental investing practices like buy-and-hold.

The final premise behind this article was to further illustrate that passive investing (index investing) is also an investing strategy that can be good or bad – depending. Consequently, it really comes down to what suits the individual investor. Do they prefer taking charge of their own investment portfolios or are they more comfortable leaving it to professional managers like those that build index ETF’s and mutual funds. Nevertheless, there are good times and bad times to invest in indices as well.

At the end of the day, the practical application of a well thought-out and disciplined buy-and-hold strategy has proven itself and really needs no defense. In the long run, buy-and-hold will be more tax efficient and less costly than more active strategies. This is not to say that more active strategies can’t be profitable, it simply means that they’re more difficult, costly and riskier to execute effectively. However, if you do build your own portfolio and practice a buy-and-hold long-term strategy, that does not simultaneously make you an active investor. Nor as described earlier does investing in an index necessarily mean that your investments are passive.

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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