Is Buy and Hold Terrible Financial Advice?
After reading this great post at Early Retirement Extreme, I was reminded about the low quality of financial advice that most people accept. Not only do they accept it, but they actually pay for it!
Mutual fund companies make billions of dollars from unsophisticated and naive investors who buy mutual funds and hold them. What most of these would-be investors don’t realize is that each year the mutual fund managers take some of the money for themselves. It seems like a small amount, only about one percent.
What people don’t realize is that this one percent adds up to a large amount of money over time. In fact, the average mutual fund owner only gets 20% of the the profits made in the portfolio. Where does the other 80% go? To the managers and to the mutual fund company, in the form of fees. This one percent fee sounds small, but it amounts to 80% of the profits!
Financial advisors never mention this to their clients. Many of them are not aware of it, and they actually believe in the financial products that they sell. However, I think that if any of them cared to find out, they would dig a little deeper and discover the truth: mutual funds are one of the worst possible investments.
The financial advisor will say, “Stay in it for the long term. Buy and hold.” This advice is misleading at best. In the past, the market has always recovered fairly quickly, say within 10 years. But there is no reason that this will continue. America is on very shaky financial ground, and so are some of the countries in the European Union. Simply assuming that the market will recover quickly is the same thinking that real estate agents promoted during the bubble: “Housing prices always go up!”
There is just one small problem with this advice. It is blatantly false. The law does not really allow you to sue a real estate agent because they lied to you about the market always going up. But if you could sue, the real estate sales industry would have a problem just as big as BP does.
Another problem with buy and hold is that people can’t stick to it. It is against human nature. When people who want to retire see their portfolio go down by 50% or more, they cannot help themselves from stopping the pain and cutting their loses. Asking them to hold on while their portfolio drops 60%, 7o% or 80% is unfair and unrealistic. If this sounds like a remote possibility, I remember news reports from the market downturn last year. They showed all these people lamenting, “My portfolio is down 50% and now I can’t retire.”
Ultimately the point of this whole post is to inspire people to think for themselves. Learn about the markets and find out if what a financial advisor is telling you is true. The information is available in books, and even for free on the internet. We only need to read, learn and think for ourselves to become better investors.
Related posts:
- Buy and Hold Investing vs. Hedge Funds
- Why Most Financial Advice Is Useless
- Why You Make Terrible Investments
- Secret #6: The Government lets Mutual Funds Charge Hidden Fees
- Investing Advice From Real Rock Stars
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I'm George Ulmer. Matt and I started this blog and launched the Online Investing AI business. Our goal is to develop the technology to allow anyone to retire after working for 10 years.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
