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.

Looking at this holistically leads me to a couple of things. First, something that hasn’t changed is that every investor needs investments that fit their profile. That still means having equities for long-term growth potential, fixed-income to reduce the volatility in their portfolio and short-term liquid investments to deal with financial emergencies. Second, something that has changed is the effect of many more investment choices and many more individual investor profiles on the process of investment selection.

Now, let’s turn to changes in markets. It’s a dynamic world. In practical terms, that means some companies are growing and healthy and others are not. Some governments are financially healthy and some are not. It seems as though the changes in status—from growing to declining, or fiscally healthy to fiscally ill—are changing more rapidly than they used to. I confess that I haven’t tried any sort of quantitative analysis to prove the point, but in practical terms, whether the actual process is speeding up or not or it just seems to be increasing is irrelevant—it still needs to be dealt with.

These changes mean that there are now companies that are definitely buy and hold investments, that weren’t a decade ago. And, there are companies that once might have been a candidate to buy and hold that aren’t today. Exactly the same is true of government bonds. If you care to remember, the U.S. federal government was running annual surpluses in 2000, 2001—a much different picture than today, even though the market interest rates would suggest otherwise if you didn’t have the full story.

Part of what is driving the changes I just referred to is the changing geography of economic and investment growth. There are many more places in the world—not just here at home—where there are now companies that rate the buy and hold status that wouldn’t have applied the past. Part of what is driving the change is the interface of changing technology and changing consumer tastes.

So, we have seen significant changes in investors themselves and in investment markets. Where does that leave us?

My suggestion is that an investor should view buy and hold not as a strategy to buy individual securities but rather as a long-term investment strategy. It’s a plan that takes into account the investor’s risk tolerance, their age and when they will need their money. In addition this plan will take into account changing economic and market conditions, changing investments options and, most important, changing investor circumstances.

It’s pretty clear that a good long-term investment plan—one in which an investor understands why they want buy and hold—takes many factors into account. A good plan is likely going to be complex, dynamic and absolutely investor-centered. That’s why I regularly point out in the investor seminars I speak to and in the videos posted on Fidelity.ca that it is a good idea to get help—to get financial advice. In addition to the expertise that an advisor can bring to the plan, the investor has the advantage of having an objective third party to help keep them on track and to help work through the inevitable changes that occur in every investor’s life.

If you buy into what I have said so far, you have doubtless been considering the implications for what it means to you, the financial advisor. In short, it means a lot of work: knowing each and every client and knowing them well; keeping up with their lives through frequent communication and investment reviews; knowing the markets and appreciating the increasingly important distinction between the influence of macro-economic events and fundamental investment selection and, most important of all, figuring out the appropriate interface between the two for each client.

The bottom line? “Buy and hold” is alive and well. But its definition should evolve to reflect the changes in investors and markets. I still like to follow the NHL at home. Despite the pleasant memories of listening to a game on the radio, I’ll stick with my high definition picture.

Peter Drake is vice-president, retirement & economic research, for Fidelity Investments Canada. With over 35 years of experience as an economist, he leads Fidelity’s research efforts in examining retirement in Canada today.

While the information provided may be intended to highlight various financial planning issues, it is general in nature. This information should not be relied upon or construed as financial advice. Readers should consult with their own advisors, lawyers and financial planning professionals for advice before employing any specific tax or investing strategy.

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