The Dangers of Buy and Hold

*This post originally appeared on Michael Morrow Financial Planner.

In general “Buy and Hold” is an investment strategy where stocks are purchased and then held on to regardless of how the market performs. While the Buy and Hold strategy has many supporters who believe it is the best investment strategy, the reality is that the strategy has many drawbacks. The strategy is especially dangerous as a retirement strategy. Some investors who are averse to risk think that Buy and Hold will limit the risk they face. Unfortunately, this isn’t always the case. Keep reading to learn more about the disadvantages of Buy and Hold for retirees.

Market Downturns

The biggest disadvantage of Buy and Hold is dealing with market downturns. If the market crashes or there is a recession, you stand to lose a lot of money. For retirees, this is especially dangerous because they don’t necessarily have the time to “hold” as the downturn corrects itself. Imagine if the market experiences a downturn a year before you plan to retire. If all of your gains are erased, how will you make retirement work? Jack Bogle can preach Buy and Hold because he has enough money to tolerate heavy losses. However, normal investors may not have the safety net that Bogle has, so Buy and Hold isn’t the best strategy for them.

Length of Time

In order for Buy and Hold to work, an investor needs time. Yet if an investor chooses the wrong stocks and holds on to them year after year, he or she may not see any significant gains. Many Buy and Hold supporters recommend investing in index funds to avoid selecting the “wrong” stocks. However, even index funds are susceptible to events like market crashes. Today many Americans aren’t preparing for retirement soon enough. Therefore, they might not have the necessary time to employ a Buy and Hold strategy and see any meaningful returns by the time they’re ready to retire.

Self-Discipline

A large number of investors lose money due to their emotions. They either chase stocks that they believe will make them rich in the short run, or they sell when their stocks underperform. However, the Buy and Hold strategy requires an investor to ignore the urge to sell or buy whenever it strikes. Every investor finds it difficult to ignore these urges at various times. When it comes to savings for retirement, safety is the most important element. Yet if risk is managed correctly, it can be beneficial to a retiree’s investment strategy.

There are many alternative investment strategies to Buy and Hold that offer retirees more security and better returns. To learn more about the disadvantages of Buy and Hold as well as some alternatives read my article Jack Bogle Warns: Prepare for Two Massive Market Declines in The Next Decade (But Heeding His Advice Could Destroy Your Retirement).