Tuesday, August 25, 2009

The LA Times is Part of the Problem

The LA Times has a story today about the death of buy and hold investing. The premise is a layup to resonate with many since the S&P 500 is down 23% over the last 10 years. That is a long time.

The problem I have with the article is encapsulated in the following example that they use in the story:

"Susan York was fed up with the dismal performance of her 401(k) retirement account. Then her husband saw a Sunday morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at pre-determined prices.

The 50-year-old from Naples, Fla., had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40% a month and is trading full time.

"It's the best job I've ever had, not just for the enjoyment but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income.""

Let's say she started with $100k, which is low if her actual intention was to replace a six figure income. Compounding at 40% per month over one year would result in a gain of over $5.4 million in the first year. Let it ride and her new bank roll will be over $310 million after year two.

Is that going to happen? Of course not. Might some readers try it for themselves? Of course.

I am not defending the professional investment industry here. Lots of pros got it wrong and the market has been dismal. I'm just pointing out that putting a 4 month fairy tale example into a financial article with a serious premise is irresponsible.

1 comment:

Anonymous said...

lol variance. lol@noobs in options.
tell me what you think. my view is always adapting and as much as i AM a bear on the buy and hold investing FOREVER method if you are starting out NOW (had its funeral at the internet bubble pop imo). im kind of in the group that believes we are in a constant bubble economy with one followed by the other in some area until that pattern breaks. we never learn our lesson and constantly repeat it. adapting to take advantage of that reality is the only way to go, right?

hey, i think long term hold for life is greatttt if you were in something in the 1990s with multiple splits and pays a nice dividend (like microsoft, my buddy has a nice $4 average share price going.)
for someone starting out now i just dont see the UPSIDE of making nice 25% gains in a 3-4 month period, then riding it down, then riding it up then down again. rinse repeat. doesnt buy, sell for 25% gain, wait for correction, buy, wait for it to tire out with a nice gain again, repeat sound better on paper?

call me crazy, but i have for the last 4 years or so been practicing a minimum 3 month outlook on my RETIREMENT funds (for fee purposes) that ride general estimated market directions over those months before entering or exiting or just stay in cash until it does. its not perfect but so far it has been strong laughing at recessions as buying opps from the sidelines has been fun.
i know you fund guys dont want to see my money go in and out as a trend everyone starts doing and will increase time limits if it happens widespread but i dont CARE what other people want with my money lolllll.
hey, in a pinch if i have to sell for 2% penalty to avoid a 20% market downturn what do you think im going to do? (havent had to do that though as i was out around the tops of all recent year runs.)
just seems to ME that would be a lot EASIER to learn for a finance noob than options, or even daytrading individual stocks (which is what i do with my non-retirement assets).

its alot easier than picking individual stocks for someone who doesnt know how to do that.
less risk, more reward. not perfect, but neither is riding it out. these years riding it out is for losers imo. but its not perfect.
" lollll...ahhh these daytraders acting like they know how to invest too posts! noobs!" :)