Editor's Note: There's a place for buy-and-hold investing, but chances are your retirement portfolio could benefit from a little strategy diversification. That's why we're revisiting D.R.'s advice for a more active approach to retirement. The tactics he shares here won't just boost your savings – they'll help safeguard against market volatility, too…
The most common retirement strategy advisors still give today is "buy a good index mutual fund and hold it forever." That aged approach has been around since I got my start in the markets in the mid-1980s.
Sure, "buy and hold" is the easiest strategy for a client to follow. After selecting a fund, there is nothing more to do.
That's why it's great for advisors and mutual funds. Keeping your money is their top priority because they get paid based on assets under management, not performance. Plus, redemptions cost funds money and time. For every "sale," they have to deal with paperwork and transaction costs when they sell shares to raise cash for the redemption.
But as investors, taking a buy-and-hold approach with all your retirement assets can be one of the biggest financial mistakes you make.
Today I'll show you the value in taking a more active approach to retirement and give you a few better strategies to grow your nest egg…
Market Pullbacks Don't Always Come at Convenient Times
Buy and hold has done a particularly poor job of protecting nest egg money, especially during two periods over the past 15 years…
Buy-and-holders have seen two drops that exceeded a 50% drawdown since 2000.
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The first drop shown is the dot-com bubble in 2000. The S&P 500 dropped 50.5%.
The second is the real estate and credit bubble that topped in October 2007. It led to a 57.6% drop in the S&P 500.
Now the market has recovered and won back the losses, thanks to the second-longest bull market of the last century. The S&P 500 has more than tripled since its March 2009 low.
That's fine for some retirees – if the timing was right…
But the buy-and-hold strategy ignores those who needed some of their funds during the huge drops. And living through two 50%-plus losses in less than 10 years is a horrible prescription for building wealth.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.