The 3 Different Ways to Buy & Hold

A podcast listener asks:

How do you think about rebalancing vs holding things like crypto?

For example, I put 2% (the amount I’d be willing to lose) of the overall portfolio in crypto and now it’s almost 10%. The bitcoin I want to hold forever, but what about others?

I entered this speculation clear-eyed about the fact that it could go to zero but not as clear about how to exit as it rose.

This is a good problem to have but a problem nonetheless from the psychological perspective if you didn’t set some boundaries ahead of time.

The way I see it there are different types of buy and hold strategies.

They are as follows:

Buy & Hold & Forget About It. This is the dream. You have an investment you would love to hold more or less forever. It’s a one-decision asset — you buy and simply never sell.

The only problem is you have to Charlie Munger it every once and a while:

If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you deserve the mediocre result you’re going to get compared to the people who do have the temper­ament, who can be more philosophical about these market fluctuations.

The hard part about this strategy is it’s extremely difficult to pick the securities that are worth holding forever. And if you are successful you must be willing to hold an increasingly concentrated position that will crash on occasion.

Buy & Hold & Rebalance. Setting some boundaries on your long-term positions can allow you to occasionally take advantage of volatility in either direction.

For example, you could buy a 5% position with a downside floor of 2% and an upside cap of 10%. This way you would be selling down your position when it’s doing well and buying more when it’s not.

The hard part about this strategy is it’s counterintuitive. You’re selling when something is going up and buying when it’s falling. Investing in this way goes against human nature.

Buy & Hold & Reassess. This is probably the way most people invest when they set out to be a buy and hold investor. It’s certainly not easy holding positions for 5, 10, 15 years or longer.

You could sell when something better comes along or when the story on your investment changes.

Most of the time that change in the story comes in the form of price, either rising a lot or falling a lot. Fundamentals tend to get thrown out the window when huge profits or losses come into play.

The hard part about this strategy is you never know if you’re selling a big gainer too soon or giving up on a big loser too soon.

Every investment you make involves some form of regret minimization. This regret could be selling winners too soon or holding onto losers too long.

Since no one knows the future it’s preferable to lay out your strategy ahead of time. That way you’re creating a premortem depending on what happens as opposed to making your investment decisions after the fact.

Creating an investment plan after the fact can be littered with psychological landmines.

It’s hard enough to stay disciplined to a rules-based investment plan. When you don’t have any rules you’re basically making it up as you go.

However, playing with house money is a pretty good place to be if you have to backfill an investment plan. That’s better than the alternative of sitting on a bunch of huge losing positions.

You just have to ask yourself:

(1) What is the optimal allocation to crypto I’m willing to have in my portfolio?

(2) How far am I willing to let these positions run?

(3) How angry will I be if I don’t trim these positions and they go against me in a big way?

(4) How upset will I be if these positions continue to skyrocket if I trim them back or sell completely?

Investing would be a whole lot easier if there were clearcut buy and sell prices that would alert you to the perfect time to enter and exit an investment.

In lieu of a crystal ball, the best you can do to keep your sanity as an investor is to create some rules and boundaries ahead of time on your various securities, strategies and asset classes.

Michael and I discussed this situation and much more on this week’s Animal Spirits video:

Further Reading:
The Psychology of Betting Big and Losing it All

Now here’s what I’ve been reading lately:

  • Why you shouldn’t make extreme sacrifices on your way to financial independence (Female in Finance)
  • The biggest job a financial advisor has that no one talks about (Reformed Broker)
  • So many accidents (Seth Godin)
  • You don’t have to take part in everything (Rad Reads)
  • 6 pieces of financial advice you can ignore (The Long Game)