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Five Reasons Why Buy-and-Hold is Dead


Why it's left a generation of investors shattered.

Wall Street, in true self-serving style, has harped on buy-and-hold mantra for decades. "Experts" have claimed there's no reliable way to time the market, and you have to be fully invested at all times to benefit from the growth potential that equities offer in the long term.

Millions of Baby Boomers' hopes of a decent retirement lie in ruins at the altar of this buy-and-hold concept. Is there a better way? That would be an interesting topic for further discussion (and I'm sure, debate) in an upcoming article. Here, I want to discuss 5 factors that, in my opinion, are contributing to the slow-but-sure demise of the buy-and-hold concept.

1. Easier access to brokers, cheaper commissions, and the rise of ETFs.

Do you remember calling a broker and placing a trade? Did you ever second-guess your intention while placing the trade? Thanks to fast access to the web that most of us have become accustomed to over the past several years, action often precedes thought. People frequently take longer to deliberate over a Chinese take-out menu than they do over placing a trade.

I often compare it to cash versus credit-card spending: Even though they're substitutes for each other, they can have a different feel, and therefore instigate different behavior.

Furthermore, technology has dramatically driven down the cost of trading. Trading commissions aren't considered to be a barrier to position entry or exit anymore. If a short-term opportunity crops up, investors don't feel shy about taking action.

Furthermore, discount brokers did to full-service brokers what ETFs seem to be doing to their mutual-fund brethren. ETFs offer real-time pricing and instant liquidity, compared to the end-of-day pricing/liquidity of mutual funds. Forget long-term buy-and-hold -- many investors aren't even willing to wait till the closing bell!

Ultimately, easier access to cheap trading opportunities led to infidelity to the buy-and-hold thought process.

2. Easier access to information and susceptibility to peer pressure.

Ubiquitous communication enabled by more efficient and cheaper networking technology has worked wonders in making the world a smaller place. But there's also a dark side. Investors -- by being connected with the rest of the world -- have added to their financial-information biases. I define this as an access to overabundant financial information that's seduced investors into believing they really know a great deal and can keep up with the ever-changing landscape. In reality, it's generated more heat than light: Information is no substitute for knowledge or actionable insight.
No positions in stocks mentioned.

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