When buy and hold is no option

February 01, 2009
ELLEN ROSEMAN

"Buy and hold for the long term" is a formula, a mantra, a way of thinking embraced by the mainstream investment industry.

In my last column (Jan. 18) in this series, I talked about why the buy and hold strategy has become so popular with investment advisers.

Advisers are reluctant to make guesses about where the stock market is going. They aren't trained to be prognosticators.

Clients miss out on gains if advisers suggest getting out of stocks too early. Clients also miss out on gains if advisers suggest staying in cash after stocks rebound.

Market timing can be costly. Clients pay commissions, deferred sales charges on mutual funds and capital gains taxes (outside a registered plan) to sell stocks and buy them back later.
Clients who hold only cash and guaranteed investments may feel they don't need an adviser. They can manage such a portfolio on their own.

So, what are the alternatives to buy and hold?

You can look for an investment adviser that uses strategies that allow you to make money when stock markets go down.

For example, you can buy put options on specific stocks or stock market indexes (such as the TSX/S&P composite index).

You can also buy the "bear plus" exchange-traded funds, which allow making leveraged bets against stock indexes or sectors such as gold, oil, financials or grains.

"A lot of people use our products hoping they lose money," says Howard Atkinson, president of BetaPro Management, which offers 28 bull and bear funds.

"They're long on the market, but they sleep better knowing they don't have the same downside."

Sixty per cent of buyers are institutions, such as mutual fund and hedge fund managers, 25 per cent are investment advisers and 15 per cent are do-it-yourself investors.

Investment advisers who use them tend to be discretionary portfolio managers. They're authorized to trade without consulting clients in advance. This is important because bear plus ETFs must be watched carefully. They're not a buy and hold product.

"Our average hold period is quite short," Atkinson adds. "It's four days." You can also get your investment portfolio analyzed by an independent firm that doesn't sell investments.

Second Opinion Investor Services, based in Toronto, charges about $2,000 to analyze portfolios. It also helps people find an appropriate investment adviser for their needs.

"Buy and hold is a platitude that is outdated," says Mike Macdonald, an investment portfolio consultant with the firm.

"Everything and everybody needs to be monitored regularly because it is often an investor's life savings and future lifestyle that is at risk.

"Buy and hold is like an airplane's autopilot. It works great when everything is going smoothly.

"Then, birds fly into an airplane's engine and the real value of a live pilot is apparent.

"Unfortunately for investors, most advisers were on autopilot and there was no heroic landing."

The buy and hold mantra is a fairly recent development, says Warren MacKenzie, who started Second Opinion. You didn't hear about the wisdom of sticking with stocks during the long bear market that lasted from 1968 until 1982.

"And picture the poor Japanese investor who retired in 1989 when the Nikkei index was at about 40,000," he says.

"After 20 years, this buy and hold investor has seen his portfolio decline by about 75 per cent, before taking inflation into account."

Next week, we'll look at how to know if your portfolio is too risky and how to file a complaint.