In an article I wrote earlier this month, I introduced the concept of investors suffering en masse from a form of Stockholm Syndrome.
Traditionally, this term has been applied to hostages when they develop empathy for their captors. The hostages begin to identify and even assist with their captors' cause. The most famous case, and what arguably brought it to mainstream understanding, was that of Patricia Hearst, a kidnapped newspaper heiress who, during her captivity, was brainwashed into robbing banks with her captors in the mid-1970s.
Being that my brain always has one dial tuned toward trading and investing, I noticed a line of thinking beginning to form surrounding many of the conversations with investors and the psychology behind Stockholm Syndrome.
Investor Story:
I recently spoke with an investor on the phone who was interested in learning more about how I invest my capital. During our conversation, he told me about what he does for a living and how he accumulated his $1-million-dollar investment account. This man worked a blue-collar job his entire life, put away a few thousand dollars every year for 30+ years, and followed the buy-and-hold strategy. It worked for him to build wealth because time was on his side, but it wasn’t sunshine and roses.
Don't Be Fooled by Passive Investing Success
While the buy-and-hold worked during the first half of his life, it was challenging ib bear markets along the way. For example, when stocks topped out in early 2000, the stock market took more than seven years to get back to break-even. During the bear market, he spoke with his adviser for investment advice, and he was told to sit tight, ignore the falling price, and if he held through it, he would be fine. But the financial distress, sleepless nights and relationship issues he had to endure when he was down more than 50% in only two years was a struggle and not pleasant, to say the least.
He then painfully watched his account claw its way back up for another five years, as the stock index reached its previous high. But the rollercoaster ride was far from over. Within a month of reaching a new high, the stock market collapsed again for another 1.5 years. This was the 2008 global financial crisis in which he had to watch his investments fall more than 55%.
Once again, he called his adviser for support, but he was much more stressed and concerned this time. He was told the same thing by his adviser, which cost him his marriage during the last bear market. The advice was to ignore the bear market, hold and don't sell; everything would be all right once the market recovered.
After 13 painful years, the stock market returned to a new high in 2013. This poor man suffered a total of 13 years with no growth and paid his adviser every year for the terrible life-changing experience. And even though the stock market returned to the previous high, the investor was still down 15% because of the AUM fee.
Investors around the world are challenging and breaking free of the status quo buy-and-hold strategy.
What I find frustrating is that both bull markets (2002 and 2008) rallied more than 100% from their lows in order to return to their previous high. Unfortunately, the buy-and-hold strategy does not allow you to participate in these powerful and highly profitable multi-year rallies.
Another thing that an active investor can profit from is falling prices during bear markets. There is a huge opportunity, and with the use of technical analysis that follows price trends and stock market cycles, we can manage our risk and positions accordingly.
Fast Forward to 2022-23:
This investor, who is now in his 50s, has built substantial wealth through his dedication to saving and investing. In 2021, when he closed his eyes, he could see, feel and smell his retirement, which was just a couple of years away.
But then, stocks topped, and both stocks and bonds plummeted in value. This started to push his retirement further into the future, and with inflation surging, he needed to downgrade his lifestyle and spending habits. All of this happened within the first few months of 2022.
His anxiety started to build as he watched his wealth shrink week after week. Finally, he knew something had to be done because there was no way in hell he was going to postpone his retirement another 7-13 years this time.
Once again, he called his adviser, desperate to protect his retirement. To his surprise, even after telling the adviser about his situation, wants and needs, the adviser recommended he continue to stick with the buy-and-hold strategy and just wait it out.
You can imagine how this investor felt when he heard the same "advice" for the third time, which didn't support his current needs or risk tolerance.
The investor said he blew a gasket, fired his adviser and moved to cash until he could figure out what to do with his investment account. His search led to him calling me to talk about active investing. He wanted to learn more about technical analysis to identify when an asset was rising or falling so he could manage his positions and not hold onto assets falling in value. Lucky for him, what he wanted to learn about is exactly what I specialize in doing with my own money.
Once I explained how the four market stages, stock and economic cycles, technical analysis, and position and risk management from a high beginner level, a lightbulb went off, and he had the AHA moment about how to invest for growth without having a large downside risk.
He was over the moon excited about this newfound knowledge and investment clarity. And he made a comment about how he had no idea that we could avoid market corrections and bear markets. He said buy-and-hold investing was beyond painful, it was torture, and he couldn't believe that he was brainwashed into thinking that was just part of investing.
Listening to this man's story solidified, once more, the driving force in my life. I want to help as many people as possible avoid these adverse life-changing events with their stock and bond portfolios. While I only shared one story with you, almost everyone I speak with has had a similar experience, and they are now on a mission to protect their capital in order to preserve their retirement and lifestyle. They know holding stocks and bonds is not a safe strategy for those in the later stages of their life or who have substantial capital.
Investors At Large Have Stockholm Syndrome
In large part, long-term investors have been brainwashed, and as a result, they struggle to break free of the financial strategies that we were all told to follow since saving the first penny.
People are so worried about missing out on a stock market rally that they will hold their losing positions and risk their retirement. If this sounds like you, then look out because you don't know what you are doing, and you're investing based on pure emotions (FOMO) without position or risk management rules in place. I can promise you that it does not end well. It works during long bull markets, but you will give it all back once a bear market runs its course.
While I won’t go into the technical details and charts in this article, just be aware that both stocks and bonds could fall another 20-47% from the current levels. Understand, I am not saying it's going to happen, but the charts are pointing to very tough times ahead.
If you remove your fear of missing out on a stock and bond rally and think with logic, tell me what you would rather do.
- Hold your positions in case stocks and bonds rally, but know if they don’t, you could lose money for 3-10+ years.
- Protect your capital, move to cash, or hold only assets rising in value so you can profit from falling stock prices and retain your current level of wealth and reinvest it later once the market bottoms.
A common problem with investors is that they start looking for a solution once they realize they need one. And once an account value falls so far, you will become too afraid to make a move, like exiting losing positions and taking the loss.
You won't want to sell because your holdings have decreased so much in value that you think a rally will start any day, and of course, you don’t want to miss that!
Yet, you are torn with the feeling that if the market continues to decline and you don't sell, you will not be able to retire.
So, fear and indecision reign, and you end up taking the nightmare stock market rollercoaster ride, which may last many years.
Most people need to realize that taking a loss is OK. For example, if you have capital losses, then you can use it against equal future gains and likely not have to pay tax on those new gains. This means you can sell your bad positions that are trending down and reinvest that money into new assets that are rising. Also, you can move to a 100% cash position, let the stock and bond market bottom, then reinvest your capital once a new bull market starts and completely sidestep the chaos.
If you are nearing retirement, the buy-and-hold strategy carries a very high level of risk. Simply put, you don't have the time to wait out another bear market.
Welcome to the financial Stockholm Syndrome effect or Buy-And-Hold, which I tend to think of as Buy-And-Hope.
There Is Another Way
Over the past 25 years, I have developed what I believe to be the most efficient and profitable ETF investing strategy I have ever experienced. It's an ETF strategy that seeks consistent above-average long-term growth with below-average portfolio drawdowns. I call it the Consistent Growth Strategy (CGS).
CGS helps investors and financial advisers outperform by solving the major investment issues of bear markets and replacing the role bonds once played in a portfolio. It seeks to hold only assets rising in value.
This tactical asset allocation strategy navigates market advances and declines using a combination of dividends, growth, bonds, currency and inverse exchange-traded funds. Under abnormal market circumstances, up to 100% of the strategy allocation will be in a defensive cash position as its number one priority is to protect capital. Remember, if you avoid losses, the profits take care of themselves.