Saturday, March 21, 2009

Investment Philosophies

The classic investment philosophy taught to preceding generations has been "buy and hold." There is little question that "buy and hold" worked well over long periods of time and those who bought stocks and held them for 20, 30, or 40 years often had a decent gain, even after inflation. Today, however, we might be hard pressed to convince a 60-year old who has just seen his 401(k) or other portfolio drop by 40% or 50% in the past year that buy and hold is the way to go. Undoubtedly, someone will say just hang on, it will come back, but the fact is it won't if the investments were in Washington Mutual, or Bear Stearns, or Lehman Brothers, or the like. That money is gone forever and many times with it the quality of a retirement.

I don't mean to say that I am completely against the buy and hold approach to investing as long as the investor has an answer to the question: Hold until when? I personally use a technical approach as the trigger to exit a position, but whatever an investor is going to use as an exit strategy, I believe anything is better than hold until I die. Unfortunately those brokers who have sold the public on the buy and hold strategy rarely include any strategy to get out when things turn south -- and at some times, the markets always do turn south.

Among my objections to buy and hold are the possibilities that a stock can go to zero, that an investor may have an important need for his money at a time (like now) when stocks are depressed, that a drop of 50% means a position must move back up 100% just to get back to even (and that doesn't usually happen very fast), and that the investor who holds until death may never enjoy the qualities of life that any gains may help provide (though his heirs probably will).

Having lived long enough to watch a lot of people live their lives, I am convinced that more folks need additional streams of income so they can pay their bills each month than need to have buy and hold positions that may or may not show great gains at some time in the future when the money is needed. If we just look at someone today who is about to retire and who had relied upon investments in a 401(k) to get him through his retirement years we can easily see how he would be better off having created additional streams of income instead of having been resigned to a buy and hold investment. Social Security may provide a stream, but we know that at the very best it can provide only a small portion of the solution for the new retiree whose investments in both equities and real estate have been devastated.

My personal investment philosophy does have a place for a modified buy and hold strategy. The modification is that I have an exit plan when the market begins a move against me. Perhaps even more importantly, however, I believe that creation of diverse streams of income from different sources can be a critical element in assuring financial comfort. My new book, "Smart Investors Money Machine" (Wiley & Sons 2009), that is scheduled for release shortly addresses many of the ways almost any of us can create these streams of income with just a little effort. Most of us need money now, at the end of the month, so we can pay our bills, but few of us have streams of income besides our jobs to enable us to pay those bills. The fact is, as I demonstrate in "Smart Investors Money Machine," that there are many ways we can create added streams of income that bring in regular cash without a great deal of time and effort. Generally the most time and effort required to add these streams of income is expended in learning what to do and how to do it. As I explain in the book, the methods can be relatively easy to learn and can be very rewarding in terms of enhanced lifestyle and permitting more time for the things we enjoy.

Bottom line for me is that I'd much prefer enjoying a number of income streams than agonizing over losses in a 401(k). Who wouldn't? The fact is, that nearly everyone can add streams of income in their lives once they have the know-how.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

16 comments:

Anonymous said...

Dear Bill,

I can't wait for your 2nd book that I have to buy. Just curious, have you personally ever done before "scalping or day trade "?. Regards Frans

Anonymous said...

Safe income streams that should be part of every ones portfolio has now become a myth exactly like the buy and hold strategy. That strategy has really been a myth for as long as I can remember.Not even the safest of all investments, Money Market funds, are immune to loss. A good parallism is the housing market. Both markets have become dislocated by greed, fraud and lack of oversite. The root cause, if examined carefully, is politics that dominate every aspect of American life. Too bad. The United States had great aspirations.

Joe said...

If your new book has identified new business opportunities for added streams of income that would be great. However, most such books cover the same old material with a new wraping. Once a business is successful it usually becomes a commodity before long and then profits diminish to a point where the little guy can't justify the economics. I am looking forward to your new book with hopes it will be unique.

sgrbear said...

I am looking forward to reading about your income stream projections....

Anonymous said...

BILL
ALL I EVER REMEMBER IS EVERYONE AND ALL THE PROFESSIONALS SAYING...BUY AND HOLD""""...
NOW THEY ALL CHANGE THEIR TUNE TO BE A TRADER................
NOTHING MAKES SENSE ANYMORE........
BELIEVE IN ONES' SELF IS INVALUABLE ADVICE THESE DAYS..AND DO MAKE THE TIME TO BE ON TOP OF THINGS........
WE HAVE GOTTEN LAZY AND HAVE RELIED ON OTHERS OUTSIDE OF THE "JUST DO IT"
OURSELVES

jerry x said...

So you're advocating the worn out theory "asset diversification."

Those with the usual mix of bonds, equities, muni's, etc. fare only slightly better than the worst equity losers.

Bill Kraft, MarketFN.com said...

I have done a little of both, Frans, but neither is my favorite approach. Thank you for your interest in "Smart Investors Money Machine."
Bill Kraft

Bill Kraft, MarketFN.com said...

Well, Anonymous, safe investments (and safety itself) is a relative term, but an investor can be quite safe with protective puts against a stock position or with a collar. As with almost everything in the markets, reduced risk usually comes with reduced reward. Nothing in this life is completely safe. Looking both ways before crossing the street still doesn't save us when a drunk careens over the curb and runs us down.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Joe. In the sense that investing and trading are businesses, I hope you see a lot of new business opportunities in the new book.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thank you for writing sgrbear. I hope you find some useful information in "Smart Investors Money Machine."
Bill Kraft

Bill Kraft, MarketFN.com said...

Amen, Anonymous. I was taught self-reliance and personal responsibility from my earliest days. I firmly believe it is incumbent upon each of us to make the time and do the work that is necessary for our own well-being.
Bill Kraft

Bill Kraft, MarketFN.com said...

Yes I am Jerry along with a number of other strategies. All of them fare much better than you would suggest with proper money management and exit strategies. As with so many things, it can be a matter of knowing how to do it rather than sitting back and criticizing.
Bill Kraft

Joe Walsh said...

I have read your book three times over the last year. I am not an investor, yet.
I look forward to your new book.
Have you made as much profit on the downturn in the stock market as you did when it was bullish ?

Bill Kraft, MarketFN.com said...

Joe, thank you for getting my book. Since you've read it more than once, I'm guessing you found some useful information. I think my accounts have done pretty well in the downturn. That is especially true when we see that none of the mutual funds followed by Morningstar made money in 2008 and the average lost about 40%. Many investors who have contacted me after having suffered losses have reported losing 50% or more. Even if an investor is purely bullish, it is my opinion that an exit strategy properly executed avoids those situations as do the protective puts, collars, and bearish plays about which you have read in "Trade Your Way to Wealth."
Bill Kraft

SEMINOLE SAM said...

TAKE A LOOK AT SOME OF THE PREFERRED ETF'S THEY HAVE SOME REAL NICE YIELDS AND THEY ARE CHEAP I THINK

Bill Kraft, MarketFN.com said...

Thanks for the suggestion Sam. Definitely worth a look.
Bill Kraft