Taking stock of change

While I paused a live hockey game the other night to grab a snack I got to thinking how the way I experience the NHL in my home has changed. It makes me smile when I recall listening to the radio, the action coming alive in my mind as Foster Hewitt called the game. Then the era of television followed, first black and white then colour. Soon televisions screens started getting bigger and the picture clearer. Now, I watch in high definition television, recording the game if necessary to fit my schedule. Things have definitely changed. The same is true in the investment world.

Buy low, sell high. Be a long-term investor.  Buy and hold. These are three examples of investing rules that have been repeated for decades. They’re all good advice. But as the world changes, “investing” also changes. And, in a period of volatile markets, it’s a good idea to consider whether any of these pieces of investment advice need updating or have they become relics of the past—like a hard to see black and white picture on an old RCA.

“Buy low, sell high” is a no-brainer. It’s every investor’s goal—and it always will be. The real issue is how to achieve that. Each of the other two pieces of investment advice still has the potential to help investors reach that goal. I’ve come to the conclusion that they need some serious updating. To be treated fairly each deserves its own column and for this one I’ll discuss “buy and hold”.

First, a little history lesson is in order. When it was first conceived, buy and hold was a stock-picking strategy. It evolved from the valuing investing approach made famous by Warren Buffet who was heavily influenced by Benjamin Graham’s book, The Intelligent Investor, which was published in 1949. That in itself is a clue that we need to think more broadly in today’s environment. The original idea was to carefully select the equities of a few under-valued companies with good future growth prospects and hang on to them.

This approach has been analyzed many times since the recovery of the global financial crisis and I will not re-hash those arguments here. I will highlight that one of the especially attractive features of this strategy was that having made carefully thought-out investment decisions, the investor could sit back and not worry about day-to-day market fluctuations because over the long-term markets will eventually reward an investor’s patience. It is this idea that would be particularly attractive to many investors in the volatile markets we’re seeing these days. The question then becomes “Is there something that investors can buy and hold and have confidence at a time when it seems to be shaken at every turn?”

From my point of view the answer is yes. What I’d like to suggest is an updated approach that would help investors worry less, but even more importantly, incorporate the many changes that have taken place, both in markets and in investors, since “buy and hold” was first floated.

Let’s think first about some of the ways investors and investing has changed:

1. There are a lot more individual investors than there used to be. That means there are a lot more investor preferences and needs than there used to be. And, the financial services industry has responded in spades with access to advice and a huge variety of new products for every financial and investment need.

2. For many clients investing is no longer something you do just to make some money. A lot of investing these days is more goal-orientated than the past. And not just vague goals around future prosperity, but specific goals that must be met, such as saving for retirement or paying for a child’s education. Put another way, in figuring out how to invest to meet their individual goals, investors must consider the risk of not meeting the goals as well as the risk associated with markets and products they are investing in.

3. Investor goals change more often and more quickly than they used to. Changes in family status such as marriage and divorce, changes in aspirations, both in terms of what the client wants retirement to be and in other areas of investment goals, such as what sort of higher education a child is aiming for and where it will take place.

4. There has been an explosion of easy access to investment information, some of it useful, much of it not. Regardless, that development has affected many investors by making them much more sensitive to what is going on (or, what the news sources say is going on) in markets and that means that investor profiles must be updated more often in the old days. This is in addition to the traditional drivers of investor profiles such as their risk tolerance, age and when they will need the funds. On top of all this, for some, there are now “ethical” considerations that will play a role in any investment selection.