It looks like we have a lively debate in full swing about the viability of the buy-and-hold philosophy when it comes to exchange traded funds (ETFs), or anything else, for that matter.
The latest salvo comes from Matt Hougan at Index Universe. He says that traders have to assume that they’re smarter than the market, and most aren’t. On top of that, he tells us that now is the best time to be a buy-and-hold investor.
The long-term argument, from a statistical standpoint, is that buy-and-hold works over time. But there are things people should do, that people will do and that people won’t do. And the fact is, if there’s something that hasn’t worked for them over the last five or 10 years, they’re simply not going to do it.
As many know by now, the S&P 500 has done nothing for the last 10 years. It’s done less than nothing, in fact. If you were a buy-and-hold investor who bought the SPDRS (SPY) in 1999, you would be below where you began.
Investors naturally buy high and sell low because they get wrapped up. They buy when they feel good, sell when they feel bad. What needs to happen is that investors should be removing their emotions from investing altogether.
In the end, Matt’s point is exactly right: buy-and-hold over decades does work. But the average investor won’t do it. Not anymore. Many investors also can’t do it – some who are closer to retirement age have lost precious time and money in this recession. Buy-and-hold simply will not work for them.
If investors can follow a simple discipline that has a higher probability of success, they’ll be motivated to do it. That’s why we promote the 200-day moving average strategy. It’s easy to implement and simple to track.
It provides sound judgment and rationale for both getting into and getting out of the markets. It gives investors an escape hatch, so they don’t have to watch in panic as their portfolios hemmorhage. It isn’t about trying to call tops or bottoms in the market, or making predictions that never pan out. Decisions made within the plan are based solely on what is actually happening, and nothing else.
The strategy is also easier than ever to put to use: investors have more motivation than ever to take charge of their portfolios. ETFs make it so easy to do, with the transparency they offer, the wide range of access they give to various markets that were once hard to reach and their cost-effectiveness.