Economic predictions of doom have flooded every news site, it seems. I’m not too worried about the conditions in the US, but I think China might be going through its own version of our 2008 soon, as their housing market collapsed and they’re now seeing several bank runs. Sounds familiar. But all of the crypto “hodlers” are getting wrecked, and the stock market is down, too. Through it all is the annoying mantra of “buy and hold”. But does this still make sense?
The issue with investing is that, fundamentally, you are trying to predict the future, but predicting the future is impossible, except in a very general sense when your predictions are based on known, independent variables. Can you brake your car to a stop in 3 seconds after driving at 70 miles per hour? Probably not. In this sense, you can predict the future, but the more variables you add to any equation, the more difficult it is to predict anything. Humans are something of the ultimate “medium number systems”, and so predicting how people will value something in the future is rather difficult.
If everything goes according to plan, I should be able to finish my year off without withdrawing money from my investments. My only fear is that not everything would go according to plan, and so I may need to withdraw some funds at a reduced market value, but I likely wouldn’t need to withdraw much, and such a worry is pretty wussy in the grand scheme of things. “Er ma grd, I may have to withdraw some money at a reduced value to be comfortable during my year off!” – yeah, get over yourself.
The principle of “buy and hold” is that you avoid making bad decisions by not trying to play the market. It’s easy and all too human to want to sell when the value is going down and to buy when the value is going up, but this often leads to serious loss of value. In the first case, you have to also known when to buy back in, and in the second case, you have to know when to sell: two prediction events that humans are incapable of accurately predicting consistently.
But when does buying and holding actually work? Does it just work for the stock market, or does it also work for cryptocurrencies, which are pretty volatile in the first place? Does it work for commodities? Does it work for baseball cards? Does it work for the discounted steak you bought last week that’s starting to look a bit gray in the refrigerator?
The principle of “buy and hold” was originally created in reference to the stock market, which various statistical analyses show continues to go up in the long run. But this was specific to the stock market in the United States. What about Japan and its “lost decade” of no growth? Sure, maybe the money grows over 20 or 30 years, and you should be in it for the “long run”, but as Kaynes famously mentioned, “In the long run we are all dead”. What if you needed to keep your money invested for 50 years before it proved profitable? Does buy and hold still work in these situations?
The FIRE community has made something of an idol of the VTSAX index fund. And there’s a certain brilliance to index funds that’s difficult to deny from a statistical perspective: index funds spread risk very thin while investing in the broader United States stock market, which has consistently gone up over time to the tune of 6-9%. Over time, this “small” return compounds quite fantastically, so although the average annual increase may be small, the consistency more than makes up for it, and you can often double your money every 7-10 years, which becomes quite impressive over even just 20 years.
But why does this idol “work”? And when does it work for other assets? And will it always work in the future?
Honestly, I like VTSAX, and I’d rather bet money on something that is historically consistent than something that is not. This is why people who buy houses will often still do well, despite my never-ceasing encouragement to not be stupid about the overall philosophy. It’s also why holding your investments and not panic selling will likely work out for people, too. If I had to hold an investment that has a track record of growth over long periods of time, I suspect this is a lot safer than an investment that does not have the same track record, especially for those things that haven’t even existed for very long. This is why I have absolutely no faith in cryptocurrencies. History and statistics mean something and lend credibility.
But they aren’t prefect predictors of the future, either. As mentioned, nobody can perfectly predict the future.
So here’s what I think about buy and hold: It’s good to be smart about your investments, but it’s even better to have backups to your investments. For one, your skills give you the ability to sell your labor and live your life, so having skills that people will pay you money for is better than having uncertain investments. However, your ability to exercise your skills is highly dependent on your health, so one of the most robust things you can invest effort into is your health (within reason). Moreover, it also pays to be flexible, so having, say, a McMansion filled to the brim with junk is one of the most fragile ways to live, as you become psychologically dependent on large space and incapable of downsizing should the need arise.
It’s also far more important to simply not need money in the first place. If you absolutely need something insane like $10,000 per month, you suddenly have to fear for your investments because if they aren’t productive in the long run, you could easily become insolvent. If you are a frugal rockstar and only need $1,000 per month (just as an example), you have much less to fear, since you only need $12,000 per year. Likewise, if you have a house that is ridiculously large and expensive to maintain, heat, and cool, you could be in trouble if the shit hits the fan and you lose your job and don’t otherwise have adequate funds to survive a downturn. And if you’re into cryptocurrencies, well, you simply can’t “rely” on anything. You didn’t put your life savings in something like that, did you? …did you?
It’s not that buy and hold doesn’t often work based on historical situations, it’s simply that being resilient is more important because the future is unknown. I’m not particularly worried about my investments, because what we’re seeing in the economy is nothing truly new, it’s just business as usual based on cycles we identified a long time ago. But I’m always reminded that the United States is something of a historical anomaly, and we still don’t know the future. I think the best prep for dealing with that uncertainty is building a more robust approach to life in general.