For the average investor, it’s hard to beat “buy and hold” over the long term, even though there will be times — such as now — that other strategies will look attractive. One such strategy is the “black swan” strategy popularized by Nassim Nicholas Taleb. The strategy is named in honor of the once-received wisdom that black swans were impossible — until black swans were discovered in Australia.
Taleb’s strategy essentially involves betting that rare events (financial “black swans”) will eventually happen, and being positioned to take advantage of those rare events. This year, that strategy has worked out well, producing returns of more than 50 percent.
So, should we all jump on the black swan bandwagon? Here’s why we shouldn’t:
Continue reading The “black swan” flies again
Those who make big sudden changes in their portfolios almost always regret it. Example: If you sold right after the 1987 crash, you lost 24 percent. If you held on two years, until September 1989, you got it all back. So take a deep breath and think hard before doing anything.
In my book, I recommend not investing in the stock market until you have your financial house in order and are willing to let the money stay in the market. And once you’ve reached that point, you buy and hold.
Recent events again confirm the wisdom of this position. Those who tried to flee the market meltdown of fall 2008 were, in general, too late. The panicked news coverage followed the worst declines. So an investor who read the coverage and then pulled out was “selling low.” That same investor, who won’t get back into the market until things look more optimistic, will at that time be “buying high.”
Do you see the pattern? “Buy high, sell low.” That’s a sure route to ruin. When all this turmoil clears, count on it: Those who do the best will be those who followed the sound advice of “buy and hold.”
And, one more thing: Suppose someone sold after the first ten percent of a market decline, and then bragged about having missed the worst of the decline after the market went down another ten or 20 percent. That bragging would turn to regret over longer periods of time, if history is any guide.
Wall Street is going crazy, but how can you make sense of it all? Here is plainmoney.com‘s simplified guide in ten easy steps:
1. It starts with the old-fashioned savings and loan association, like the Bailey Building & Loan in the classic movie It’s a Wonderful Life. That savings and loan association would accept deposits from people, loan them out on mortgages, and all was well. (Stay with me; this is going to be easier than you think.)
Continue reading A plainmoney guide to the meltdown