You might’ve heard the saying that investing is simple, just buy and forget. This phrase is often used for new comers on the market to ease the pain of being active on the market.
However there are dangers in this old saying and we are going to analyse just why.
The saying “buy and forget” is a simple investment strategy that suggests purchasing a particular investment, such as a stock, and then holding onto it for an extended period without actively monitoring it. It’s an easy strategy that may save your time as you are not attached to your investments so closely. But on the flip side you may lose money while you are not up to date on your investments.
And before we go any further, this post is far from advocating you should actively buy or sell your assets when ever there is even the slightest drop or jump on the market.
But let’s cut to the chase! Here’s another perspective on why you don’t want to forget what you own.
Economic and market conditions are ever changing
Economic conditions change over time. What might be a promising investment in a bullish economy might underperform or be riskier in a bearish one. Failing to adapt to changing economic conditions can lead to poor returns. A specific sector may not be continuously in your favour, just like we don’t use compact cassette tapes no more. Some fields disappear as new inventions emerge. You don’t want to miss those opportunities.
The “buy and forget” strategy might lead to missed opportunities for capitalising on undervalued assets or shifting investments to take advantage of emerging trends. Active investors often seek to optimise their portfolios based on current market conditions.
Company related events and mishaps
Individual companies can experience shifts in performance, management changes, or other factors that can affect long-term outlook.
If you only buy and forget, you are locking yourself on investments that may cause you to lose money. For example consider you had bought Enron at its rise to all time highs. What once was a good investment can quickly turn into something else. Tracking your stocks and holdings minimises this risk for you. Sometimes these events can occur fast and there is no time to react. Then again sometimes you may just would've had the chance to protect your capital if you were up-to-date on what was happening to your investments.
Risk Management — Balance and adjust
As stated, market conditions are continuously evolving. Sometimes, this evolution affects your portfolio in a way that compels you to rebalance your positions. Having a large position in a single asset can be risky. Then again a company related mishap may force you to reduce your exposure to a specific company. Alternatively, unexpected life events can throw unforeseen challenges your way, requiring your portfolio to be prepared for such situations.
Changing Allocation: Over time, the performance of different asset classes may cause the portfolio’s actual allocation to deviate from the target allocation. Portfolio reallocation involves adjusting the distribution of assets to bring it back in line with the investor’s original or updated investment strategy.
Rebalancing Frequency: Investors may choose to rebalance their portfolios periodically (quarterly, annually, etc.) or when specific triggers occur, such as a significant market event or a change in personal financial circumstances. Regular rebalancing ensures that the portfolio stays aligned with the investor’s goals and risk tolerance. When your positions are in balance and risk is minimised your financial security is in a much better state.
Tax Efficiency: Portfolio reallocation should also consider tax implications. Selling appreciated securities can trigger capital gains taxes. Tax-efficient strategies involve minimising tax consequences while rebalancing the portfolio.
Are you an emotional investor?
Consider that you haven’t been following the market lately and you haven’t checked out your account. You see that your portfolio is down -20% from the start of the year. Is your first reaction to sell everything or keep a cool head?
Investors may experience emotions such as fear or greed during market fluctuations. The unknown is often far more frightening than the actual known facts. While the ‘buy and forget’ strategy can work for some investors to keep a cool head, one should also consider the fact that staying simply up to date on events in the market and one’s investments would help in avoiding making irrational and emotional decisions in sudden situations.
Wrap up
In conclusion, while the “buy and forget” method can work for some investors, it may not be suitable for everyone. If you only invest in index funds it’s arguable that you can simply buy and forget your holdings. However if you invest in individual companies and sectors you wan’t to know the trends, market environment and the state of the companies you are invested in.
Active management and periodic reassessment of investment holdings using a platform such as Stockle can help address changing market dynamics, manage risk, and seize new opportunities in the ever-evolving world of investing.
