Business forum: Buy-and-hold is a risky, 'Rambo' strategy

So how's that "buy-and-hold" strategy working for you?

Advisers say, "Stay the course," implying not too subtly that selling is for sissies or fools. Strategists seem more concerned about missing the upturn than riding the market down and losing clients' money.

What's happening? When did preservation of capital become stupid? For some time, America has been fed an unhealthy diet of extreme makeover investment advice by an industry under the influence of a "Rambo"-like cocktail of testosterone and hope.

Slowly but steadily, the lines that delineate prudent and normative investment behavior have been redrawn and Americans are now taking on far too much risk in their portfolios. Even the "conservative" advice of today would have seemed speculative little more than a generation ago.

Investing the bulk of one's portfolio in stocks and mutual funds is a relatively recent phenomenon. For most of the 20th century, savings accounts and bonds were the primary options for people working hard enough to accumulate more dollars than they needed to live on. Certainly, the typical middle-class American or the prosperous upwardly mobile "near wealthy" had, at most, relatively modest exposure to the market. Stocks were seen -- correctly -- as speculative vehicles that were only appropriate for those dollars that you could afford to lose.

The idea that, say, a middle manager in a large corporation should have most of his savings in stocks would have been ridiculous. Ask your father -- or grandfather -- they'll tell you.

The shift began in the late 1970s, as the birth and development of the financial planning profession fed the enormous growth in products manufactured by Wall Street. The ensuing symbiotic relationship between Wall Street product manufacturers and Main Street financial providers created what I call the "Financial-Industrial Complex."

But are these sales imperatives in the best interests of most investors?

Just imagine the consequences if investors cut back their stock exposure to only 20 percent of their portfolios. With most of your money in bonds and money markets, your broker would find his commission income reduced. Financial planners would have a hard time justifying 1 to 2 percent portfolio management fees on a low-risk, low-maintenance portfolio. Since bond and money market mutual funds charge much lower management fees than stock funds, a massive shift of assets out of stock funds into these alternatives would decimate the business model of every major investment institution.

As the old saying goes, if you want to find the truth, follow the money. I have no doubt that your adviser and the people quoted in the media sincerely believe that you, too, can be like Warren Buffett by buying and holding stock in good companies forever.

But even Warren Buffett is having trouble being Warren Buffett these days. Nevertheless, Buffett is unlikely to sweat market declines. In fact, his stock investments could plummet 90 percent and he'd still be a billionaire. What about you? Most of us really can't "bend it like Buffett" after all.

Having 70 to 80 percent or more of one's retirement assets exposed to the stock market is needlessly speculative. It may seem late to ask this question, but do you really need to take that risk to get where you want to go?

Have you ever asked them what would be so terrible about missing the first few months of a new bull market?

It all comes down to the wisdom inherent in the ultimate risk question: What if you're wrong? If you're cautious and you're wrong, it means you've missed out on some attractive gains in the market, not forever -- just until you decide to get back in. On the other hand, if you stay the course in the market and you're wrong, it could mean additional losses of 20 to 30 percent or even more. Which way would you rather be wrong? Which "mistake" would be more life-altering?

I do not make predictions, but I think it is safe to say that the world economy has entered uncharted waters. While I believe that we will eventually see our way out of this mess, it is of little practical use to be told that 10 years from now we will be happy again as investors.

Consider this: Lake Superior is a pretty placid body of water most of the time; but does that mean you can heedlessly stay out on the lake in the midst of a major storm?