Buy and Hold - Two Mistakes

Buy and hold is really a way to make two mistakes with one investment. And I don't care whether you're investing in mutual funds, individual stocks, bonds, options, real estate or the money market. When you simply buy and hold any investment, you're making two mistakes.

Of course, no investment strategy is 100% correct for every scenario but I want you to think about the losers in your portfolio. While these concepts are true for all investments, I want to specifically address your mutual fund losers.

Mutual Fund Losers

Too much investing in mutual funds is done in the "rear view mirror" of return performance as people analyze the previous years returns and make their mutual fund investment based upon historical averages.

The problem with this approach is that the mutual fund industry has a "unique" method of reporting their investment returns to begin with - And the second problem is that on a historical average, 87% of the actively managed mutual funds lag their respective index fund indices and of the mutual funds that exceed the index fund average, 34% cannot repeat their performance the following year..

This is mutual fund investing mistake # 1!

Mistake #2 is the typical response to mistake #1...not selling the mutual fund after you lost money.

Remember that opportunity cost is still losing money so even if you experience a positive return, if your mutual fund lagged it's comparative investment indices, you still lost money.

This is mutual fund investing mistake #2!

Sell The Losers - Keep The Winners

One of the silliest habits rookie investors have is to sell the wrong mutual fund and subsequently keep the wrong mutual fund investment. How many times have you heard someone brag about the big gain they made by selling their winning investment?

And how many times have you heard someone talk about the "loser" that they're waiting to "turn back around" so they can sell it? They already know it's a dog but they cannot emotionally sell when they should because then they would need to admit making a bad investment.

If they keep the loser, it's not a bad investment since it's just a "paper loss". And claiming to be sticking to a "buy and hold" investment strategy only justifies this really bad idea.

So what's really happening when you treat your loser mutual fund investment as a buy and hold strategy?

• Losers are Losers for a Reason
  Unless there's an obvious turn of events, what makes you think these losers will miraculously become the next winners? Winners have a habit of winning while losers are usually only good at losing.
  
  Stick with the winners (don't sell) and dump the losers (sell, sell, sell)
• Emotions Rule Your Money
  Nobody likes to admit screwing up but we all do it. It's vitally important that you invest in a manner that doesn't involve your emotions. Research the investment pros, they all use data driven systems to guide them.
• We built our Tactical Portfolio Management system as a dynamic mutual fund management method that takes all emotions out of the equation. Falling in love with any investment can be brutally destructive. Don't love your mutual fund, analyze it and dump it when it doesn't perform.
• Losers Love You
  Who wouldn't want a high paying position that doesn't need to be performed with any level of competence? Mutual fund companies spend millions of dollars convincing you to buy and hold.
• Why do they promote buy and hold? Because it sounds so much better than promoting, "let us keep charging you full price even when we fail to meet even average performance levels". Pay for winners...dump the losers.

When selling winners, always look to sell your losers as well. It might deflate your ego a bit but it'll inflate your wallet...which is better?

You're judged by the company you keep so stop keeping company with losers. Look at your mutual fund investments today and get rid of the losers. Take what's left of your investment and add it to your winners. Forget "buy and hold", do it today.

After all, as the book Rich Dad Poor Dad points out, you learn more from your mistakes than your successes. Learn from the loss and move on.