I was reading The Wall Street Journal the other day, and an article caught my eye (“More Investors Say Bye-Bye to Buy and Hold,” April 8, 2009). The premise was that some investors are beginning to trade more frequently for a variety of reasons, from attempting to recoup losses to trying to profit from short-term price movements in individual issues.
This reminds me of the infamous Business Week cover story “The Death of Equities,” which ran in 1979. Over the next 20 years, the stock market had a total return of +17.9% annually, the highest in modern history. People who changed their approach out of frustration or panic, or after reading that article, missed out on substantial gains over the following years.
In down markets, people are understandably worried, and all sorts of investment strategies appear out of the woodwork. As of the end of 2008, large company stocks had the worst 10 year returns since 1926, when the Ibbotson data series begins. This includes the Great Depression. In such an environment, some people are tempted to abandon long-term investing in favor of some different, often self-destructive, approach.
At Parsec, we do not engage in market timing, or dramatic shifts in our clients’ asset allocation based on the mood of the day. We do believe in a low-turnover approach, but our portfolio strategy is more sophisticated than a pure buy and hold. A buy and hold strategy does not answer the important question, “When do I sell?” There are two primary types of trades that we make in client accounts: trades at the block level and trades at the individual client level.
In a block trade, we are selling a particular security across all client accounts. Our conviction regarding that security’s merit as a long-term investment has changed. The trade may be at a profit or at a loss, but our Investment Policy Committee has determined that there are better opportunities elsewhere.
The second type of trade we make is at the individual client level. When we review client portfolios, we ask ourselves “How can I make this portfolio better?” This may encompass reducing an individual stock position that is overweight, or correcting an overweighting or underweighting in a particular economic sector. When an individual stock exceeds 5% of a client’s portfolio, it is our policy to reduce the position unless there is a client-specific reason not to do so. There may be an opportunity to improve diversification, to add a new investment idea, or to increase portfolio income. If there is no trade that we find compelling, then we take no action. Although it can be difficult, oftentimes the right thing to do is to do nothing at all.
We believe that a buy and hold strategy combined with a sell discipline, broad diversification and avoiding market timing will allow our clients to prosper over the years ahead.
Bill Hansen, CFA
May 15, 2009