December 13, 2019
With Maeve home from school and Phoebe and Sophie on break for Thanksgiving weekend a few weeks back, it was just great to have all the Cutters together. With Thanksgiving in the rear-view mirror, Christmas is now in our sights. Over Thanksgiving weekend, we put up the tree, decorated the house, and everyone was in good spirits heading into the Christmas season. All in all, a successful weekend. Before she headed home, Maeve took the opportunity to go through her closet to find her good heavy winter boots. While digging around in there, she came upon a couple of old boxes she’d stored away years ago. They contained a slew of her old collections – her worn and gray beanie babies, numerous pairs of old, tattered brand-name softball cleats, and her favorite yet – her lip balm collection. And not just any lip balm – but those egg-shaped ones that were all the rage with young girls a few years back. They came in all sorts of colors and flavors with fancy names, and I think Maeve has every single one ever produced. But the funny thing about these “eggs”? None of them have been used, they’re still sealed in their original packing.
You see, Maeve used to be quite the collector, or hoarder, when she was younger. Once she found an item of particular interest, she started collecting them . . . and lots of them. She just bought them and held on to them. Unfortunately for the lip balms, they’re pretty useless now. Maeve cracked one open to see what it looks like and it’s all dried up, so she just tossed the whole collection away. Luckily, she’s moved past her hoarding tendencies and didn’t seem too upset about it.
But you know, the idea of buying something and just holding on to it indefinitely reminds me of an outdated investing concept called “buy-and-hold”. This is an investment strategy where you buy stocks and hold them for a long time, with the goal that they will increase in value over a long period of time. While this historically has been considered the holy grail of investing during the accumulation stage of one’s financial lifecycle, it can be a very inappropriate strategy for folks in either their transition or distribution years of their financial lifecycle.
So, this week, let’s dig into the buy-and-hold concept to see when it might make sense, and when it could be downright inappropriate to your retirement system.
Now, many folks use the buy-and-hold approach when they are in the accumulating phase of one’s lifetime. This is typically when they are more than ten years away from retirement and can afford to take more fluctuations with their money. If the investment takes a big hit, the investor has time to weather the market’s insecurities, so it may make sense to plan on holding on to these investments for the “long haul”. During this time, I find folks are incorporating common strategies such as, dollar cost averaging. Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals; in effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices.
Another benefit to the buy and hold, it is easy. All you do is buy and hold. Simple as can be. In many instances gains realized are considered long term capital gains, which may be taxed lower than short term capital gains. Essentially, you set it and forget it.
Hmmm . . . set it and forget it may not be appropriate in your distribution phase.
Here is why. You see, the buy-and-hold isn’t appropriate for everyone or every phase of your financial lifecycle. In fact, it could cause some serious damage to your retirement system in the years leading up to and through your retirement.
If you’re nearing or in retirement, a paradigm shift must occur. Folks, this is critical here. When you are in your distribution years, your investment strategy must also produce consistent income for the rest of your life. What happens if you have a significant loss? What happens to your income plan? If you start taking income when your portfolio is down, it’ll be exceptionally hard to make up for your losses and rebuild again. Think about how long you could wait for an income-producing investment to come back before you had to sell it. How can we set it and forget it in this situation . . . you cannot.
I will add some color here; let’s look back at the most famous – and worst – stock market crash in US history, the Crash of 1929. The Dow peaked at 381.17 on September 3, 1929. It finally hit the bottom at 41.22 on July 8, 1932, down 89.2%. In less than 3 years, a dollar invested in stocks dropped to barely a dime. The Crash of 1929 was the worst loss in U.S. stock-market history. Stocks didn’t surpass their pre-crash highs for a quarter of a century.
A quarter of a century. Think about it – could you wait twenty-five years for your portfolio to come back if you sustained heavy losses, especially if you’re planning to retire soon? I’m not saying that a crash like 1929 will happen again, but shouldn’t you be prepared? Shouldn’t you ask yourself, “What happened to the traditional buy and hold in years such as 2001, 2002, and 2008?” What is your current strategy and how did it behave during times of market stress like this? Your strategy must now balance investment and income planning, and work together to set you up for reliable, sustainable income in retirement as well as reasonable growth potential.
So, as you approach retirement, you need to rethink how and where you invest – and for how long. With fewer years until you need to access your nest egg, it just doesn’t make sense to buy or even be holding on to stocks that have no downside risk mitigation strategy (DRMS).
A DRMS is specifically designed for folks who understand the importance of deploying a comprehensive retirement system that emphasizes risk adjusted rates of return. A DRMS uses quantitative data to help mitigate losses during times of market stress. By reducing losses, the time to get back to even is shorter which better facilitates an income plan to get you through retirement.
Folks, as we approach the New Year, this is the time to reflect on where you are in your financial cycle, what your risk budget is, and how your current system has behaved in times of market stress. And as you move from one financial life cycle to another, make sure your investment approach changes with you. Because after all, buy and hold works…. until it doesn’t.
So, be vigilant and stay alert, because you deserve more . . .
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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