Buy and Hold Investing Kills Investors

Ben Stein famously said, “If you didn’t lose a lot of money during the Panic of 2008, you were probably doing something wrong.” I heard those words and wanted to scream. His view could not be any farther from the truth. People made fortunes in 2008 with solid moneymaking strategies. The winners were not doing anything wrong, they just happened to have had the vision to prepare for the unexpected, and when the big surprises unfolded they cleaned up.

Investors have been conditioned for decades to believe that they cannot beat the market. They’ve been told to buy index funds and mutual funds, listen to CNBC, and trust the government. I have news for you: That does not work. We have all seen one market crash after another for the last decade. But the powers that be keep telling us that the old investing ways are the only way. Deep in our gut we know its not true. Even if we dont know who the winners are, there are winners in the market, especially in the middle of a crash.

Trend following is a new way of thinking, a new way of making money that is entirely different from what you have been taught. It varies vastly from what you have heard from the brokerage firms, the media, and the government. Bottom line: I go looking for answers where most people cant or dont know how to go. Digging for trend following trading lessons is my lifeblood.

Plenty of people write books telling you that they know what will happen tomorrow. Do you really want to bet on the words of people who say they know what will happen tomorrow? Doesn’t that just feel like a roll of the dice at the craps tables? Exactly. It is nonsense. However, I do not want you to take my word.

Their are men out there that have literally pulled in billions of profit from the market for decades. They are true trading winners who have shared with me their lessons to money- making success. In turn, I am sharing their wisdom with you.

What are the most common threads among these men and their successes? They were all self-starters not born with silver spoons. They did not start with inheritances (but you could have). They figured out how to win, when everyone said they’d lose. They never quit. As diverse as their stories are, they all make up an inspirational foundation you can use to start making a fortune over the course of your lifetime.

Reality of Mutual Funds

Are you willing to admit that buy and hold only works for people who live forever? However, mutual funds still make a fortune for selling the dream:

Mutual Funds with Largest Fees 10-Year Period $21.40 Billion Total Fees Earned
Fidelity Magellan 99-08 $3.70B
Fidelity Contrafund 98-07 $3.00B
American Century Ultra 99-08 $2.30B
PIMCO Total Return 99-08 $3.00B
American Funds Inv Co Amer 98-07 $1.54B
Fidelity Growth & Income 99-08 $1.56B
American Funds Growth Fnd Amer 99-08 $2.10B
Fidelity Low-Priced Stock Fund 99-08 $1.66B
American Funds Europacific 98-07 $1.74B
Fidelity Dividend Growth 99-08 $0.80B

$21 billion in fees have been paid to mutual funds for no performance over the last 10 years. Why pay billions to mutual funds for no performance?

Annualized returns 2000-08 Large Cap U.S. Stocks International Stocks U.S. Bonds
Market Return -0.27% 2.29% 6.06%
Loss due to Fund Expenses -2.04% -3.47% -1.39%
Loss due to Emotions -0.94% -0.51% -1.33%
Total Penalty -2.98% -3.98% -2.72%
Average Fund Return -3.25% -1.69% 3.34%

Consider more sobering statistics:

  • The typical American household has net financial assets of $1,000. When Americans were asked to estimate the net financial assets held by the typical household, only 7% correctly answered under $2,500.
  • In 2016 we will begin paying more in Social Security benefits than we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be exhausted.
  • At their peak 46% of working Americans were covered by a pension plan. By 2005 it had declined to 17% and it continues to drop annually.
  • America’s so-called greatest investor, Warren Buffett, had many of his biggest investments bailed out in 2008. If no bailout, his firm Berkshire Hathaway sinks.
  • 40% of people with incomes less than $35,000 believe the lottery is the best chance they have to getting $500,000 for retirement.
  • There is no more earning interest on cash in your account. The Fed has reduced interest rates to 0.

Abigail Johnson
President of Fidelity Investments
Net worth: $11.5 billion

That’s a large net worth for delivering no return. Bottom line, mutual funds are big ‘skimming’ operations. They skim a little off everyone and before you know it the head of Fidelity is worth $11 billion dollars. Worse yet, consider the Nasdaq 10 years after the Dot-com bubble implosion:

The charts are the truth regardless of what a broker might say. So what’s happened in response?

  • According to Fidelity Investments, a record number of consumers borrowed from their retirement saving plans in the second quarter of 2010. Sixty two thousand Fidelity Investors made hardship withdrawals from their 401K plans. That’s a 10-year high.
  • CNBC ratings are down. Have some finally tired of Jim Cramer ranting (really crazy starting at 2:00 minutes).
  • There are bull markets in bonds and gold. That’s fear; it’s not sound investing strategy. It’s sheep behavior.

More Data Against Fundamentals

Is there a way out? Yes. The great traders are not buy and hopers or fundamental traders. The great traders have a plan to deal with the unknown. They know how to handle their emotions. They make money when all hell breaks loose (i.e. 2008). The market winners are trend followers who have learned how to ride the bucking bronco up and down for profit.