In talking with a friend at lunch last week, I offered up the title of this weekend’s missive and made the mistake of asking his opinion. My friend isn’t one to mince words so I guess I shouldn’t have been too surprised when he nearly jumped across the lunch table and with fire in eyes said, “Are you nuts? Have you lost your mind?”
In an escalating voice the tirade continued. “I can’t believe you would even consider that. You know what? You’re gonna get yourself sued, and frankly I won’t be there to back you up because if you so much as intimate that people should consider returning to the old mantra of buy and hold… well, I don’t know what I’d do because such a suggestion is completely irresponsible!”
After sheepishly checking to make sure the entire restaurant wasn’t staring or dialing the police, I responded in a calm voice and with a slight degree of sarcasm, “But seriously, don’t hold back… what do you really think?”
Okay, so a guy that trades his own account to pay the bills probably might be a little jaded in his view. In short, my friend doesn’t buy and hold anything, ever. Well, except for the gold and silver locked in the vault in his basement, but that’s another story entirely.
Getting to the point, the question of whether the public should go back to buy-and-hold was triggered by a discussion with a neighbor this week. I was told that this couple’s financial advisor had told them that the crisis was over, the economy was on the mend, and that it was time to get back to buying mutual funds. In short, they were encouraged that they should simply “stay the course” because the bear is over. To which, I wanted to reply (at the top of my lungs), “Are you nuts?”
Mini Me vs. The Real Deal
While I most definitely have been on the bull bandwagon since the early part of March, I have also tried to couch the concept of this being the start of a traditional bull market. In fact, we even created a new term – the “mini bull market” – so as to not mislead anyone into thinking that this was the real deal.
You see, we are of the opinion that while there may be some significant upside left in this “mini bull” run, the move will likely prove temporary from a big-picture standpoint. As we’ve stated a time or three this year, this remains a secular bear market. As a quick reminder, a secular market cycle is one that lasts for many years – usually a decade or more. For example, we enjoyed a secular bull market from 1982 – 2000, during which time the buy-and-hold strategy was born.
But, now it’s fairly obvious that we’ve got a secular bear on our hands. Remember, anyone who plunked money into the average growth fund at the beginning of 1999 is still down about -20% or so. (Actually, the cumulative return for the Lipper Large Cap Growth Fund index from 1/1/1999 through Friday is -25.25%.)
While it is enjoyable to see account values climbing up off the mat these days, we want to make it clear that this is NOT 1982 revisited. Sure, we can make the case that stocks are relatively cheap (although not terribly so). But it is important to understand that the conditions that would warrant a return to buy and hold are nowhere to be found.
This is NOT the typical recession in which the Fed can knock rates down and watch everything grow nicely for the next five years. In light of the fact that we just experienced the biggest financial crisis in a generation, it is safe to say that the economy has incurred some serious damage. As such, it will likely take a fair amount of time to heal fully.
Yes, the economy will recover (feel free to insert that “dead cat” joke here). However, the recovery faces significant headwinds, not the least of which is a consumer that has seen their 401(k) get cut in half and their once fat home values shrunken considerably. So, Mr. and Mrs. John Q Public are not likely to return to their free spending days any time soon.
And with the government pushing the envelope on just how much money can be borrowed, once this round of bail, borrow, and spend is over, it is questionable how much more the government is going to be able to help in terms of economic growth.
So, while it is okay to be bullish for a while, it is definitely NOT okay to return to the set-it-and-forget-it days in your portfolio. The good news is there WILL be another secular bull market at some point. But please don’t kid yourself into thinking that it will be in the next year or so.
It’s Time To Be Flexible
I know what you’re thinking; “I thought this guy was a card carrying member of the glass-is-half-full club. But frankly, now I’m depressed.”
I will admit that having an optimistic view is actually important in this business. While the perma-bears have had their day in the sun of late, in the long run, there is no question that one must be optimistic about the prospects for the economy, the country, and the stock market. As a country, we’ve encountered tough times before and we’ve always prevailed. So, while it may sound corny, this isn’t the time to throw in the towel on the good ‘ol USofA.
However, coming full circle, this probably IS the time to put the idea of buy and hold up on the shelf for a while. In short, we firmly believe that investors are going to have to be flexible going forward. There will likely be times where being more heavily invested is appropriate (like now) and there will likely be times where it will pay to play some defense.
If this debacle has taught us anything, it is that we can’t be potted plants. No, we have to have a plan to deal with the environment. Something besides, just hang in there, that is.
So, the real point – and the one I made to my neighbor over a beer – is that it’s okay to sell when times are dicey. Really, selling is NOT anti-American. And it’s also okay to invest in things other than the US stock market and plain vanilla mutual funds. There is a great big world of investment opportunities out there. So, from where we sit anyway, it makes sense to have a plan to explore them.
Wishing you all the best for a profitable week ahead,
David D. Moenning
Founder TopStockPortfolios.com
Positions in Stocks Mentioned: None
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