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Basics of The New Buy-and-Hold

The New Buy-and-Hold Investing Paradigm is the investing paradigm of the future. This page covers the basics of how the new paradigm came to be and what it offers to middle-class investors seeking financial freedom early in life.

Basics of the New Buy-and-Hold

The Stocks-for-the-Long-Run Investing Paradigm was discredited during The Great Safe Withdrawal Rate Debate, a series of investing discussions held at a number of Financial Freedom Community discussion boards, beginning in May 2002 and continuing until the present day. This section of the PassionSaving.com site sets forth articles describing the investing paradigm that I believe will take the old one’s place in years to come. I call it “The New Buy-and-Hold.”

This article provides an introductory description of The New Buy-and-Hold Investing Paradigm by answering five basic questions about the new paradigm. Links to articles exploring the specifics in more depth will be set forth at the bottom of this page as they are published.

Basic Question #1 — Why is there a need for a new investing paradigm?

The Stocks-for-the-Long-Run Investing Paradigm provided middle-class investors seeking financial freedom early in life with powerful insights as to how to invest successfully for the long term. The most important of these insights was the idea that the risks of stock investing are greatly diminished for investors who hold their stocks for long periods of time.

Stock prices are highly unpredictable in the short term. They are far more predictable in the long term. Asset classes providing predictable returns are safer than asset classes not providing predictable returns. By adopting a buy-and-hold investing strategy, you turn your stocks from a risky, unpredictable part of your portfolio into a less risky not-so-unpredictable part of your portfolio. Buy-and-hold works. Buy-and-hold makes sense.

Other tenets of the Stocks-for-the-Long-Run Investing Paradigm do not make sense, however. If long-term stock prices are largely predictable (and the evidence gathered by the Financial Freedom Community during The Great Safe Withdrawal Rate Debate strongly argues that they are), then it makes sense to increase your stock allocations at times when the predicted returns are the best available and to lower your stock allocations at times when the predicted returns are not so hot. In short, it makes sense to engage in long-term timing. Yet the Stocks-for-the-Long-Run Investing Paradigm argues strongly that timing of any sort (not just short-term timing, but long-term timing too) is not possible.

The Stocks-for-the-Long-Run Investing Paradigm contains an internal contradiction. Two of its two key tenets, the tenet saying that long-term returns are predictable (and that the risks of long-term stock investing can therefore be reduced by engaging in long-term buy-and-hold strategies) and the tenet saying that long-term timing is not possible, are at odds with each other. Middle-class investors seeking financial freedom early in life need a new investing paradigm, one that hangs together. The New Buy-and-Hold is our community’s effort to fill the void.

Basic Question #2 — How is The New Buy-and-Hold Investing Paradigm different from the Stocks-for-the-Long-Run Investing Paradigm?

The principal difference is that The New Buy-and-Hold advocates that investors engage in long-term timing of stock purchases. Stock allocations should be increased when stocks are cheap. Stock allocations should be lowered when prices are high.

There are dozens of differences in approach that follow from this distinction in the core understandings of how stocks work that animate the two investing paradigms.

Basic Question #3 — Are there other core distinctions between the Stocks-for-the-Long-Run Investing Paradigm and The New Buy-and-Hold Investing Paradigm?

A Better Way to Invest

The other core distinction is that The Stocks-for-the-Long-Run Investing Paradigm advocates buy-and-hold investing strategies without offering much guidance on how to succeed at buy-and-hold investing in the real world. The old investing paradigm assumes that, once an investor accepts that buy-and-hold investing is a good idea, he will be successful at engaging in it.

The New Buy-and-Hold Investing Paradigm views buy-and-hold as a powerful strategythat is extremely difficult to pull off. Thus, the new paradigm places much focus on developing practical strategies for middle-class investors to use to position themselves to realize the fruits of buy-and-hold investing not just in theory but in the real world too.

Basic Question #4 — How was The New Buy-and-Hold Investing Paradigm developed?

I did preliminary work on development of the new paradigm (without knowing that I was doing so) in the mid-1990s, when I was putting together my Passion Saving plan to finance a transition from life as a corporate journalist to life as a freelance writer of non-fiction books. I turned to the use of safe withdrawal rate analysis to help me determine what sorts of income streams I could count on during my “retirement” from my corporate writing career.

During the time that I was putting together my plan, I read work by John Bogle showing that the value proposition offered by stocks is not a stable thing, but something that varies with changes in valuation levels. Stocks can generally be expected to provide stronger long-term real returns starting from low valuation levels than they can starting from high valuation levels.

Bogle’s arguments helped me to see the grave flaw in the conventional safe withdrawal rate studies. The conventional studies contain no adjustment for changes in valuation levels. I was not able to do the statistical calculations needed to determine accurate safe withdrawal rates. But it was clear to me that the conventional methodology studies were not analytically valid. If Bogle is right (and there is a great wealth of evidence showing that he is), the safe withdrawal rate cannot possibly be a single number. The number varies with changes in valuation levels.

I reported on this insight in a post that I put to a Financial Freedom Community board in May 2002. That post generated a good bit of help from fellow community members. Ultimately our community determined beyond any reasonable doubt that Bogle was right. Safe withdrawal rates do indeed vary with changes in valuation levels.

Once the core insight driving the debate was confirmed, our community turned its attention to exploration of the implications of the insight. The purpose of this section of the site is to record our tentative findings, make them available to a larger community than the community that is able to access them at our discussion boards, and extend the reach of the insights to make them of more practical benefit to the hopes of middle-class investors seeking financial freedom early in life.

Basic Question #5 — How confident are you of the claims about The New Buy-and-Hold Investing Paradigm that you will be putting forward at this section of the PassionSaving.com site?

A Less Risky Way to InvestI am reasonably sure of the claims. The core ideas that animate the claims were subject to great scrutiny during our community’s Great Safe Withdrawal Rate Debate. I believe these ideas will stand the test of time and change our understanding of what works in buy-and-hold investing in important ways.

That said, these ideas are new ideas and have not been subject to enough testing and discussion yet for you to be able to place great confidence in all of them. You can afford to have almost complete confidence in some of the most basic claims. For example, the claim that changes in valuation levels affect long-term returns has been supported by a good number of the most-respected investment analysts in the world — people with names like William Bernstein, Scott Burns, Rob Arnott, Peter Bernstein, Robert Shiller and Andrew Smithers. It is hard to imagine that all of these well-respected experts developed entirely wrong takes on this most basic of investing questions.

Some of the findings derived from examination of the implications of that insight must be viewed as tentative in nature. It is through the discussions that will be sparked by the publication of articles at this section of this site that our community will come to a richer and fuller and more complete and more accurate understanding of how best to engage in buy-and-hold investing.