Buy and Hold is a Myth. 24.06.08
So you’ve set up your Roth IRA and are ready to start plowing money into the market. What’s your plan? If you’re like most people, you don’t have one. You think that you should just buy and hold certain stocks or etfs and wait until retirement.
From: Bespoke Investment Group
Case in point: the banks. If you have been averaging in the bank etf $BKX for the past ten years, without taking profits, you would be losing money. The etf doubled from it’s lows five years ago and in the past year has taken back all of these gains. Do you see why having a strategy is important?
Of course there is a difference with trading and investing, but there’s one thing that the two have in common: risk management. If you’re investing for the long haul, you still need to have stops in place and contingincies written out. Your set of rules should tell you when to take profits, move your stop, add on more of a position, and when to pull off when you need cash in more valuable places. You also might want to consider option strategies (selling some stock and buying protective puts, or selling calls).
Even if you’re rules are based off strict asset allocation, it still requires you to take profits. Say for you to have a properly diversified portfolio, you want to allocate 5% of your investment account to the banks. If the etf doubles like it did (and all things being equal), your allocation is now up to 10% and too much for your portfolio. So you have to take some profits in order to keep your portfolio in balance. You would still give back some gains, but not as much if you didn’t look at it.
Wealth management is not an easy job. If you stay disciplined in your investing approach, however, then you will have a distinct edge over 80% of the people in the market.