Small Business Financial Article
|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Is Buy-Hold the Best Investment Strategy for Business Owners?
A common trait shared by most highly successful business owners is their willingness to invest a substantial amount of their time, energy and money in their own venture. Even as their business flourishes, many business owners will continue to invest heavily in their business because, to them, it is the best investment they can make. While that may be true in some instances, it can leave any business owner highly exposed to any number of risks that can threaten their financial future.
To create financial security, business owners must have an asset allocation strategy that incorporates their business as part of a diversified portfolio of various asset classes, including stocks, bonds, and other assets, that act as a risk counterweight to their business. The problem, as many business owners explain, is they lack the time and expertise to focus on an investment portfolio outside of their business. That’s where a tried and true “buy-and-hold” strategy could be the best course for business owners to follow for achieving steady long-term investment returns.
Buy-and-Hold may not be Bold, but it Works
The Buy-and-Hold strategy does work – if, and it is a big “if”, it is applied correctly. The biggest mistake Buy-and-Hold investors make is they allow themselves to deviate from its basic premise, often as a result of over-monitoring, over-analyzing or over-listening, all of which invite emotions into the equation. Emotions are the enemy of an effective Buy-and-Hold strategy.
Granted, it’s difficult not to get emotional over an intra-day 500 point drop in the stock market; or watching your portfolio lose 20% of its value in a bear market. But, in most cases, when decisions are driven by emotions, they are ill-timed or ill-advised.
Your Objectives are Your Guide
Essentially, a Buy-and-Hold strategy is part of an overall asset allocation strategy in which a portfolio is developed around your overall investment objectives with consideration for your risk tolerance. The portfolio is usually comprised of several different investments representing different classes of assets that don’t necessarily correlate with one another. This has the effect of offsetting risks associated with each asset class.
In practice, Buy-and-Hold strategies are most effective the less they are monitored. This prevents the emotional factor from interfering. Reviewing your portfolio once per quarter is more than sufficient to consider any adjustments to rebalance according to your investment objectives and risk allocation.
The mistake many investors make in trying to time the market cycle is they have a tendency to buy somewhere in the middle of the accumulation phase of the cycle and then sell somewhere in the middle of the mark-down phase after the decline has accelerated A Buy-and-Hold strategist can plow right through the cycle phases with the confidence it will repeat itself, albeit with an overall upward trend.
Index Funds are the Buy Hold Tool of Choice
Index funds are designed as buy-and-hold investment vehicles. By their very nature, they don’t serve any other type of investing very well, at least not over time. When held through a series of complete market cycles, they have consistently outperformed most other investment strategies. By combining index funds and exchange traded funds from different asset classes, it is possible to create the diversification and balance needed to smooth out most any market ride. But, the second biggest mistake Buy-and-Hold investors make is to fail to rebalance their portfolios after significant moves in the market, in either direction. While it’s tempting to let your winners run, you could be exposing your portfolio to excessive risk if your target allocation is breached by big market moves.
Most business owners are Buy-and-Hold investors by default. In essence, that is the strategy they employ with their business; and many have neither the time nor expertise to succeed as stock pickers. The sooner we realize many of the most successful investors in history were of the Buy-and-Hold ilk, we can march on with pride and confidence in a tried and true strategy.
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