Financial Opinion and Insights

Does Passive Investing Mean Buy-And-Hold?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

You’d be surprised how many people will say they believe in ‘buy-and-hold’ and equate it to passive investing.  What they forget is that following a buy-and-hold strategy means there’s no portfolio rebalancing.

So what?  It means that as capital markets move, the portfolio’s allocation mix changes, producing changes in the portfolio’s risk and return characteristics!  It virtually guarantees an increase in risk over time and a very likely result, in the short run, of being wrong at every major market turn.

For example, with a buy-and-hold strategy, the portfolio’s allocation to stocks reaches its peak just when a bull market ends and a bear market begins.  The opposite is also true.  The allocation to stocks reaches its bottom just as a bull market begins.

As the exposure to stocks increase, so does a portfolio’s overall exposure to market volatility.  As time goes by, it means our investor is increasing risk even as the time-horizon is getting shorter.

Instead of buy-and-hold, periodic rebalancing would preserve the portfolio’s risk initial risk exposure while moving assets into asset classes when they are down and out when they go up.

Isn’t that what buy-low and sell-high is all about?



Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.