Investing Your Money – When “Conventional Wisdom” Is Not Wise

Conventional wisdom says “buy and hold” investing is superior to other forms of investing.  Sometimes, there can be a case for buy and hold investing. For example, depending on the choices available, 401(k) investing often amounts to buy and hold investing. Also, in taxable accounts, the tax considerations may dictate more of a buy and hold approach.

A younger person who is clearly in the accumulation years of investing can use buy and hold investing as a reasonable approach. However, the older a person becomes, the less tolerant they are of radical swings in the market. The conventional wisdom of, “Just ride it out” or “You can’t time the market” leaves investors of all ages and circumstances feeling they must endure the buy and hold approach and the wild roller coaster that ensues.

The wealthy do not typically use a buy and old investing approach – and that should tell you something.

Why is conventional wisdom not wise?          

In my work as a Seattle conservative investment manager, I have found people follow the conventional wisdom of buy and hold investing because they are told this is just what they have to do, or that they will be making a mistake not to do it. They assume this must be true because so many people are saying it.

In the end, the masses are always wrong.” Don McAlvany 

It is better for one’s reputation to be precisely wrong than approximately correct.”
John Maynard Keynes, British economist

 Buy and hold investing isn’t a question of right or wrong. Rather, it’s about how much stomach do you still have for market ups and downs, and how much time do you have to endure that much pain? In your 20’s and 30’s it is less relevant than it is when you get older. However, the same people often say the same thing regardless of the age of the investor: “Just ride it out”.

Richard Russell has been writing Dow Theory Letters since 1958, and has thousands of loyal followers all over the world.  Russell is an independent thinker and is not beholden to the investing industry. He said recently,

“I’ve never let my subscribers take losses in a primary bear market. I believe we are now in a primary bear market that will go down in history as the worst bear market we have ever experienced. I believe this bear market will touch or break below previous historic lows.”

What Russell means is that when he sees market risks ahead, he tells investors to get out of the way. He has been on the “right” side of predicting market collapses for 57 years. By definition, it means he does not believe in buy and hold investing – and he does not follow “conventional wisdom.”  Right now, Russell sees huge risk right in front of us – and that is being ignored by the “convention wisdom” proponents.

If you get confused and just don’t know who to believe, you are likely to just follow the crowd and get caught in “conventional wisdom.” I understand this dilemma. Many do not have the time or interest to do the research on both sides of the buy and hold debate. 

Tips for investors who want to leave behind “conventional wisdom”:

  1. Question the thinking and advice from anyone whose track record had people endure the last crash and “ride it out”. Find an alternative investment manager who does not solely subscribe to the narrow view that buy and hold is the best way to invest.
  2. Look for bias. Is the person giving the advice to buy and hold benefiting financially while you take the ride up and down in the stock market? This is why I seek information from those who are more independent thinkers and who have largely been successful in avoiding past market crashes. Granted, no one is perfect in this area, so search for multiple sources that are not only independent, but have a fairly consistent track record.
  3. Think for yourself. Visit my website to see articles and interviews from independent experts I follow, and to learn more about risk-averse and an conservative investment management approach.

How Do The Wealthy Invest Their Money?

There are several differences between the wealthy and the average investor. Your gut instinct would tell you that the wealthy have much more money to invest than most. This may be true, but unlike the wealthy, the average investor has much more to lose in today’s risk-saturated market.

During my professional research, I learned two things about the very wealthy:

  1. They take very little risk.
  2. They invest very differently from the average investor.

The wealthy did not take the advice most investors were given over the last 10-15 years. Also, many seek advice from those who study when and how to get out of the way of risk before it comes.

Dont focus on making money. Focus on protecting what you have.

Paul Tudor Jones, famed investor and multi-billionaire

It is possible for the average investor to implement some of the same strategies and investment tools as the wealthy:

  1. Be defensive when others are offensive and vice versa.
  2. Avoid losing money. Warren Buffett said, “There are two rules for investing: Rule #1 Never lose money. Rule #2 Never forget rule #1.
  3. Traditional “asset allocation” as practiced by the financial planning community does not protect you during a market collapse.
  4. Don’t follow the crowd.

I believe it is possible for average investors to largely get out of the way of downside stock market risk, and still be able to participate in the upside of the market. I will be discussing these tools and how investors can minimize their risk and grow their wealth at a complimentary seminar in Bellevue on September 22, Space is limited so make sure to R.S.V.P. to claim your seat!

Learn more about conservative investment management and my upcoming seminar, “Be Stock Market Smart: Strategies to Minimize Your Risk”