During Prolonged Market Volatility, Who Has More Success – An Asset Revester or A Buy-And-Hold Investor? 

I have read so many articles recently from the investment industry and the so-called financial professionals about what happens to your investment account value if you don’t follow the buy-and-hold method.  

What I learned is how good some professionals are at making people see and feel what they want them to through misleading titles, graphs, and averages. The findings extrapolated from the presented scenarios can be downright unethical when you dig just beneath the surface. For example, if you consider the emotional and financial pain, stress, and anxiety that a retiree holding falling assets during a bear market or recession experience (especially when an unrepentant financial industry led them to believe everything would be A-OK), it is unacceptable.   

Some study titles, angles, and quotes used to make you think the buy-and-hold strategy is the only option for investors are: 

  • If you miss the best ten days in the stock market, you miss half of the growth. 
  • Why you will miss the best market days if you sell during high volatility. 
  • To make money in the stock market, do nothing, just hold. 
  • Time, not timing, is what matters. 

Before I really get into the meat of this article, let me backtrack and state one quick thing. I do think the buy-and-hold strategy can be a valid option for young investors with smaller investment accounts and who have a 30+ year investment horizon. But if you are nearing retirement or are retired already, you don’t have “time” on your side. During bear markets or recessions, Buy-and-Hold morphs into Buy-and-Hope, and hope has no place in an investment portfolio. If you are a Buy-and-Hoper and need to withdraw capital to subsidize your retirement during this time, you will compound your problems and suffer from “sequence of returns risk,” which is, arguably, the most damaging thing to a retiree’s financial future. 

Current Financial Industry Standards 

So why does the financial industry do this? Well, the system is built around managing money in a way that is simple, can be sold to the masses generationally, and can leave your money in the market for 10, 20, or 40+ years with minimal adjustments, and all the while you are paying AUM fees. To a technical trader and investor like me who rails against the traditional Buy-and-Hold strategy for anyone over 40, AUM stands for ‘Assets Under Managed’ rather than ‘Assets Under Management.’ For if you are losing piles of money with Buy-and-Hold, what assets are actually being managed? I know investors who are paying $35,000+ a year in advisor fees, and they lost about $750,000 in 2022 following so-called ‘professional advice.’ 

Another reason the advisory industry pushes out content like this is that if the professionals all support it, then to the average investor, it looks like the diversified buy-and-hold method is the right and only way to manage money. But the reality is that diversification is the best way to suffer from volatility and have status quo returns like every other hoodwinked investor who remains uninformed about technical analysis and asset revesting methods. 

Multimillionaire investor Jim Rogers said: 

“Diversification is something that stockbrokers came up with to protect themselves, so they wouldn’t get sued for making bad investment choices for clients, and that you can go broke diversifying.” 

Recently, I’ve been thinking more about when the best days in the stock market actually happen. It’s easy to think that these days occur when stocks are surging higher in a bull market, but is that, in fact, true? It turns out that it is…and it isn’t.  

Chances are that in a clear bull market, whatever strategy you are using, be diversified buy-and-hold, technical analysis, fundamentals, etc., your account will be on an upswing. It’s a time when many individuals loosen the reins on the rules and opt not to lock in profits along the way, instead choosing to try and increase their returns more dramatically. Or they may neglect to set protective stops, believing that they can figure it out and deal with it later when the price starts to weaken. When this downturn inevitably begins to happen and is confirmed on whatever news source an investor tunes into, it is at that moment most people apply risk control measures, like a stop loss order, to protect their money. Unfortunately, by this point, it is often already too late. 

I should quickly and steadfastly note that delaying protecting your position and capital is NEVER a good idea. It is ALWAYS better to make the first thing you do after entering a position is to set a protective stop and control your risk. Bad things happen, and they generally happen fast in the markets. If you are not around to exit a position, it could be very costly. 

In a bear market, the answer is not so cut and dry. For example, let’s take a moment to examine the following findings: 

“About 42% of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. Another 34% of the market’s best days took place in the first two months of a bull market—before it was clear a bull market had begun.” 
Source: Ned Davis Research, 12/21, as cited by Hartford Funds 

An investor who is weathering the storm brought on by the buy-and-hold strategy during a bear market is likely to cling to these days as though it were a life-saving ring. As I see it, though, the problem is that the life ring is not attached to anything. There is no dock, there is no ship, there is no land, and there is no one to pull you to safety. There is just you, bobbing away in the middle of a hostile ocean.  

Will you stay in that environment forever? It is unlikely. If you can hold on long enough, the tide will eventually turn, and the stock market will turn bullish again. Your accounts will creep higher, and the day will come when you celebrate breaking even. Time will pass, and you will hit new high watermarks and think, ‘let the good times roll’! Memories of financial ruin, desperation, fear, stress, and anxiety will fade, and the cycle will begin again. 

Sounds like a fun rollercoaster ride, right? 

The best time to hold stocks 

Let’s take a few minutes to dig deeper into the quote above to see if holding stocks during those big rally days during a bear market is worth holding on to. Given the fact that 76% of the strongest days in the stock market occur within bear markets and during the early Stage 1 bottoming phase, it should be the first red flag that what the financial industry preaches may not be the holy grail strategy they say it is. 

Think about it. During a bear market, when prices are falling 1-5% per week over many months, who really cares if there is a 5 – 10% rally in the price of stocks if the price is still lower than before the bear market started. You are still losing money, and all those short-term rallies do is give panicked investors false hope that the market has bottomed and is starting a new bull market. 

The same can be said for how the industry claims dividend reinvesting is a great, low-risk method to build wealth. Again, nothing could be further from the truth. If an asset price plummets by 30%, is a 2% dividend payout going to make you feel richer? Does it make up for the huge decline in your life savings at a time when you need it the most? Dividend stock investing is how you achieve status quo returns. 

The Reality of Buy-and-Hold/Hope 

I want to take a moment to walk you through an actual investment scenario. For this example, I will assume that a $1,000,000 account was invested in a diversified portfolio of assets that tracked the performance of the S&P 500 index. The investor used the buy-and-hold strategy through the market peak of the Dot-Com peak and held through to the break-even recovery level many years later.   

The Dot-Com crash began in March 2000 and lasted until October 2002. During this period, the S&P 500 index fell by approximately 49% from its peak to its bottom. In this case, the S&P 500 index did not return to its March 2000 peak until September 2007, approximately seven years later.  

Assuming the same account and portfolio data from above, investors had one month, ONE MONTH, to celebrate returning to their previous account high of $1,000,000 before the bottom dropped out again. This time, the S&P 500 index dropped approximately 57% from its peak in October 2007 (a loss of $570,000) to its bottom in March 2009. This time, the market didn’t fully recover to its pre-crisis levels until March 2013.  

Unless you were one of the fortunate few who chose a different approach in September or October of 2007 and moved to cash or used a strategy to profit from the declining market, it took 13 years to break even. A 13-year drawdown is beyond painful – it is life-altering and nothing short of a nightmare for a retiree.  

As a brief aside, if you are unsure what a drawdown is—I have been shocked to learn that many active investors do not understand—please click this link to learn more. There are two types of drawdowns that you need to be aware of. 

Fast forward to today, in the volatile Stage 3 topping phase market phase we are navigating, capital protection and asset management are a must for investors for the next several years…unless you like afore mentioned roller coasters. 

During that 13-year nightmare, there were some big rally days in the market, and the financial industry wanted us to believe this was a cause for hope if not celebration. In actuality, none of them mattered because they all happened when the investments were already at a loss. In fact, the only time missing big rally days makes you fall behind a little is during a raging bull market when stock indexes are making new all-time highs. Those are the real growth rallies. 

So, in the end, for those not yet back to their previous highs, all they did was serve as a destructive rallying cry to ‘hold on and things will get better.’ At the end of the day, did the buy-and-hold strategy work? Sure, but it took roughly 4,700 days to do so.  

Do you have that long to wait? 

In Conclusion 

I would like to leave you with the question, ‘what if you had made a different choice in 2000 or 2007?’. And let’s follow that up with, ‘what if you make a different choice right now?’. 

The biggest gain days in the stock market can happen during both bear markets and bull markets, but they are more likely to occur during bear markets or recessions. 

During a bear market or recession, stock prices often fall sharply due to negative news or events that impact investor sentiment. However, there can be days when positive news or events occur that lead to a surge in investor confidence and buying activity, resulting in significant gains in the stock market. 

But remember that big gains (or losses) in the stock market on a single day are only confirmed with hindsight and may not necessarily indicate a trend or predict the direction of the market in the long term. 

While buy-and-hold can work if you have decades to go before retirement, why suffer through the declines to that degree at all?  

In all of my years of trading and investing, my mistakes taught me a few valuable lessons. 

  • Protect your capital, period.  
  • Use risk and position management (aka profit targets and stops) to protect your capital first and to grow your account second. 
  • Be okay with sitting in cash while the world around you chases the pops and drops. Let others deal with the stress, anxiety, and fear brought on by chasing the highs while you remain calm and go about your day. 
  • Understand your strategies. 
  • Don’t settle for pat answers or unanswered questions when seeking to know what is happening with your money. Be your own best advocate. No one strategy is going to perform the best in every single market condition. It is up to you to learn as much as you can. 
  • Know what kind of trader or investor you are. 
  • Once you understand your core personality and how it can undermine your returns, you can put in place the strategies that will be best suited to you.  

Ultimately, you are the one in charge of your financial reality and future. You. Not your advisor. Not your friends, family, or colleagues. Not anyone else but you. The sooner you own that, the sooner you will be free. 

Having been an active trader and investor since 1997, I have lived, learned, and profited through multiple bull and bear markets. I have survived and thrived in global events because I trade and invest differently from others. Through the use of technical analysis and an asset hierarchy, I identify trends, follow prices, and manage positions and risk. This is my first key to long-term success.   

This article has now been published in issue #93 of TradersWorld on page 53!

Chris Vermeulen  
Chief Market Analyst  

Disclaimer: This and any information contained herein should not be considered investment advice. Technical Traders Ltd. and its staff are not registered investment advisors. Under no circumstances should any content from websites, articles, videos, seminars, books, or emails from Technical Traders Ltd. or its affiliates be used or interpreted as a recommendation to buy or sell any security or commodity contract. Our advice is not tailored to the needs of any