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  • Writer's pictureOu Da Wei

MoneyOwl Portfolios Fell -20% in 2022: Why Passive Buy & Hold Often Leads to Losses

We’ve all heard the advice to buy and hold for the long haul. Is this helpful for our investments? Definitely. After all, there’s a reason why this has become such a common piece of advice.

Yet time and again, I’ve met so many new clients worrying about what to do with their unrealised investment losses. When asked about their transaction history, often many of them express that they have held on to their investments for years.

While there are those who like to trade, I do see a vast majority of everyday folk having the habit of leaving their investments untouched. They understand that holding on to what they bought is a good investment habit, and also prefer to spend their time attending to other areas of their lives.

But if people do hold on to their investments and the market goes up in the long run, why do so many investors still end up with losses? Why do we hear friends and family sharing that they’re in losses even after they’ve invested for over 10 years?

An Invisible Fallacy

People often look at the market’s historical movements and think their practical results would be similar. “The world’s stock markets have averaged +8% yearly for the past 30 years, what could go wrong? I’ll just leave my investments be.”

Of course, past results don’t indicate the future. The good performance for the last 30 years was contingent on many factors, including a growing world population, the US being a superpower, global revolution in technology, plus you simply having picked an appropriate fund to get the necessary exposure.

But I’m not referring to any of these. The reason why many end up in losses after holding their investments for 30 years… is something so glaringly simple many miss noticing it altogether.

When our nose is on the canvas, we can’t see the painting. So let’s pull ourselves back to look at the big picture.

The Natural Rising Cost of Crisis

Imagine a young man, Dave, who just started investing. Having drawn his first paycheck after setting aside some funds for various needs, Dave finally has room to invest his money. He starts by investing monthly in general stock markets like the US S&P500. As his income rises over the years, he also increases his monthly investments, occasionally adding in lump sums.

Common Investment Journey

As the years go by, this young man has also experienced downtime in the market. Sometimes it is a relatively minor one, with losses of only about -10% and recovery times of 1-2 years. After 1-2 years, Dave’s portfolio returns to riding an uptrend. Dave tells himself it would be good to buy more the next time the market falls, i.e. “Buy-The-Dip”. A good 20 years fly by with much investment profits reaped.

Then.. it happened. In the 21st year, Dave, along with the rest of the world, experienced a major global financial crisis. Crucially, this was also when Dave, with his income now higher alongside his total investment profits gained over the years, also had his largest investment portfolio size ever.

Adding salt to the wound, unlike the time when his kids were young and he spent much of his savings on raising his family, in the last 5-10 years Dave had been having more monthly savings and yearly bonuses. This was primarily due to his higher income and also now that his children are older, a lower household spending. So Dave invested heavily with the excess money he had.

When he just started investing, Dave had $30,000 in investments. Now in his late 40s, his portfolio stands at $300,000, before the global financial crisis caused him to lose 50% (-$150,000) in year 21.

It Couldn’t Be Avoided

Having his portfolio reduced by $150,000 from $300,000, Dave lamented. If only I avoided this by selling earlier!”

But deep in his heart, Dave understood how impossible this was. Firstly, given that more serious market downturns occur every 5 to 8 years, Dave knew he would encounter them about 5 times in his investment journey of 30 years. Chances are at least 1 would be a major market crisis.

Secondly, when the crisis started, the market hadn’t dropped that much yet. Everyone was saying to “Buy-the-Dip” when the market fell -10%. It took months before reaching -20% then -30%… all while the “Buy-the-Dip” voices gradually got softer.

It was a slow and agonizing fall. Similar to the 1970s inflation crisis, the 2000 Dot-Com Bubble Burst, and the 2008 Financial Crisis (all of which also fell nearly -50%), this time it also took a whole 1.5 years before the market reached its bottom. Dave did think about selling halfway through the fall, but the thought of realizing his losses was too painful.

At this point, Dave’s greatest fear was that he would need to wait 5-7 years for a full recovery - the same amount of time the market took to recover from each of the 3 crises mentioned. His spare cash available to “Buy-the-Dip” couldn’t do much too, now that his portfolio dropped from a much larger $300,000 (not $30,000). Realistically he does have the time, since being in his 40s, he should still have at least 15 years before retirement.

But even if he had 30 years, having to cut out 5-7 years is going to be immensely painful.

It’ll Probably Happen to Us

If we’re carrying out a “Buy and Hold for 30 years” approach to our investments, the above experience from Dave would likely happen to us in the future. What happened to Dave was, in short, caused by these 5 natural factors when doing a buy-and-hold:

  1. At least 1 major market crisis is likely to occur in your lifetime.

  2. This can happen at a time when you have the most money invested than ever before, simply because your income and savings are higher than before.

  3. It is extremely difficult to avoid major crises by selling off before they happen as they can often have slow declines spanning 1.5 years. And there is no way to know when a 10-20% correction is going to turn into something worse until it is too late.

  4. Monthly top-ups and “Buy-the-Dips” are not enough to mitigate the recovery time when your portfolio is large.

  5. Because a -50% drop requires +100% for recovery, it is normal if you need to spend 5-7 years just to break even again.

Interestingly, none of these factors have to do with investing in the right single product. Instead, all of them happen due to the buy-and-hold approach having no risk management to protect against the downside.

Traditional Retail Portfolios

To tackle this, many retail portfolios create downside protection by holding bond funds, leading to 80-20, 60-40 portfolios, etc. Many portfolios from robo-advisors, including MoneyOwl, are examples. However, this:

  • Reduces your returns substantially the more you protect against downside

  • Sometimes it just doesn’t work, especially during an inflationary period.

MoneyOwl Portfolio Performance

In 2022, the MoneyOwl Balanced and Growth portfolios fell about -20%, almost just as much as the S&P500 itself. Even if your portfolio is currently in overall profits, it is important to acknowledge that the above scenario for Dave could very likely and naturally happen to you in the future.

The Solution

Have you heard of the term risk management? Experienced hedge fund managers tend to attribute the drivers of return to effective risk management. You would rarely hear them say it is due to buying the right stocks or funds.

But what exactly is risk management? It’s not a straightforward concept, which is why AllQuant’s IBF-funded investment course needs 3 full days. The result is their multi-strategy model that has 12% annual return since 2006 and returned positive during 2008 and COVID periods.

Due to its focus on managing risk, dynamic switching, and flexibility to allocate cash, an experience as common as Dave’s would be unlikely to happen.

To understand more, do reach out to AllQuant or myself via our Coffee Sessions. It means a lot to us if we can help you avoid Dave’s experience.

AQ Multi-Strategy Model Performance
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Ready to start your investment journey? Chat with us over a cup of coffee through a session facilitated by iFAST Senior Investment Adviser, Ou Da Wei, to find out more.

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We are not financial advisers or fund managers. The information published on this Site is provided for informational purposes only. It is not intended to be, nor shall it be construed as, financial advice, an offer, or a solicitation of an offer, to buy or sell an interest in any investment product. Nothing on this site constitutes accounting, regulatory, tax, or other advice.

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