Buy and Hold Investing Is Dead: What Does That Mean for Gold?
While much of the coverage you’ll read in the financial media talks about the merits of buying and holding, the reality is that fewer and fewer investors are buying and holding stocks. And that has profound impacts on the entire investing world.
The reasons behind the lack of buying and holding are numerous. On the one hand, we’ve seen some pretty amazing volatility in stock markets over the past couple years, with indexes plunging close to 40% before recovering to push back towards all-time highs. That volatility has been great for Wall Street investors who can benefit from that kind of volatility, but it’s less good for investors who are hoping to build long-term wealth, such as saving for retirement.
On the other hand, we’re seeing an increasing casino mentality pervade investment circles, reminiscent of the dotcom bubble, the housing crisis, or the Bitcoin bubble. Do you remember how many people got involved in day trading in 1999 and 2000, how many people started trying to flip houses in 2006 and 2007, and how many people started buying Bitcoin in 2017?
With online apps such as Robinhood, stock investing is easier and more accessible than ever, and more and more people are taking advantage of that. But rather than investing for the long term, they’re looking to reap maximal short-term gains, buying cheap and selling as soon as they can to make a quick profit.
The Theory Behind Buy and Hold
The theory behind buying and holding is that it’s impossible for investors to be able to beat markets by trying to time them. It’s believed to be better to take advantage of dollar cost averaging so that over a long enough period, making regular purchases, investors minimize their exposure to losses. Sometimes they buy high, other times low, but with stock markets that are always rising, they’re always making money.
That theory relies on stock markets continuously growing, which they don’t always. Over the past couple of years we’ve seen stock markets largely plateauing. The Dow Jones Industrial Average first hit 26,000 in early 2018, 27,000 in mid-2019, and 28,000 in late 2019. Today it’s still hovering below 28,000. But it’s had quite a ride during that time, falling below 22,000 points in December 2018 and below 19,000 points in March of this year.
Many investors have understandably panicked as a result of that volatility, worried that they’ll lose significant portions of their investments. And that has led them to become a little more trigger happy and ready to hit the sell button.
The Theory Behind Passive Investing
The theory behind buy and hold investing has gone hat in hand with passive investing. Passive investing theory posits that actively looking for stocks in which to invest will more often than not result in lower returns than by merely looking to invest in stock indexes. As passive investing has grown in popularity, more and more investors have placed their funds into passively managed funds, those which seek to mirror indexes such as the S&P 500, the Russell 3000, and others.
The amount of funds under passive investment has grown significantly, with many market observers warning that this type of investing leads to apathy on the part of investors. After all, investors should be reassessing their investments on a periodic basis, assessing which investments are performing and which ones aren’t, which ones should be sold, etc.
That kind of periodic reassessment is supposed to impose market discipline on underperforming companies. Those who aren’t performing see their stocks sold, while those who are doing well see increased demand for their stocks. But with the rise of passive investing, that kind of pricing information that leads to market discipline is breaking down.
Easy Money and the Wall Street Casino
What has also broken down the role that stock prices play in informing investors is the rise of easy money. With over $3 trillion having been added to the Federal Reserve’s balance sheet this year, and over $6 trillion since the 2008 financial crisis, Wall Street is flush with money. And that has ushered in a casino-like atmosphere among Wall Street, both among professional money managers and ordinary investors.
In fact, the average amount of time that a US investor holds a stock today is just 5.5 months, down from an average of 8.5 months at the end of 2019. This is in stark contrast to days gone by, in which investors held stocks for years. In the 1960s, for instance, investors on average held individual stocks for nearly 8 years. Those days are obviously long gone, but even in the heyday of the 1980s and ‘90s stock market boom, it wasn’t unusual for investors to hold stocks for 2-3 years.
Holding stocks for less than two quarters barely gives investors time to assess the strength and performance of a company before they ditch its stock. It also means that investors are likely trading stocks based not on material information such as quarterly performance disclosures or annual reports, but rather on rumors and non-material information that may circulate through financial media or on social media sites.
All it can take today is a well-timed or well-placed tweet to drive particular stocks into double digit gains or losses, more than enough to convince some investors to sell or buy. And as that drives markets, investing fundamentals mean less and less.
What Does This Mean for Gold?
The primary result of this is that long-term investing for wealth appreciation and asset growth is no longer the domain of stock market investing. Holding a stock even for two years is now more than four times longer than the average, an eternity to modern investors. With all the twists and turns that markets are undergoing, it’s perhaps not surprising that investors are looking to shed the risk that stocks bring, with a potential crash around the corner. But this short-term investing focus is going to make it much more difficult for most investors to build up real long-term wealth by investing in stocks.
While that isn’t great for stock markets, it’s good news for gold, which almost by default has become the investment asset of choice for those looking for long-term wealth maintenance and asset appreciation. Even though much of the financial mainstream likes to think of gold as an asset to be invested in only periodically during downturns, and even then only in single-digit percentages of your portfolio, the reality is that investing in gold can be highly beneficial to growing your assets.
Since 2001, gold has risen in price at an annualized pace of over 10%, versus 5% or less for the Dow Jones and the S&P 500. That’s pretty incredible performance, and if it holds for the next 20 years, it will make many a gold investor very happy.
Analysts are already expecting most investment assets to show negative real returns over the next decade, meaning that gold could be one of the best bets for investors. Gold has always been an investment intended for long-term growth rather than get rich quick short-term investing, and investors who have invested as much as 20%, 30%, or even 50% of their assets in gold can attest to how it has helped them not only ward off the worst effects of stock market crashes, but grow their investment portfolios even further.
With a gold IRA, you can even roll over existing retirement assets from accounts such as a 401(k), 403(b), TSP, or IRA account into a gold investment, giving you an IRA that has the same tax advantages as a conventional IRA account but with the ability to own physical gold coins or bars. If you’re looking to protect the wealth you’ve already built up, maybe it’s time to start thinking about investing in gold today.