Think the U.S. stock market will gain another 20%-plus in 2018? Guess again. With stocks richly priced, the bull market nearly nine years old, and the Federal Reserve likely to raise interest rates three times in 2018, expect much lower returns.
If you Google “buy-and-hold investing,” you’ll easily find dozens of articles that say the strategy is tried and true.
And you’ll find almost as many that say it’s dated and overrated.
Which is accurate? A lot depends on the individual investor.
Simply put, buy and hold is an old-school passive investment strategy that emphasizes long-term growth over short-term thinking or market timing. An investor who employs a buy-and-hold strategy actively selects stocks and mutual funds, but once that’s done, isn’t concerned with short-term price movements and technical indicators.
An investor’s age plays a role with buy and hold
The strategy generally makes sense for a younger investor who is accumulating assets for retirement but doesn’t plan on tapping into them any time soon. Younger investors usually have years, or even decades, to recover from negative swings in the equity markets.
For example, during the 2008 market crash, when the S&P 500 lost 51% in less than a year and a half, many investors grew scared and sold their holdings at a significant loss. Those who lost the most were the ones who got out of the market near the bottom and failed to participate in the big rebound that followed. Hanging in there paid off for those with a longer-term focus.
But for the older investor who is at or near retirement, this strategy may not work so well. If you were fully invested in the bear market of 2008 and already taking withdrawals, you may have had to take a 40% reduction in income to preserve your assets long enough to not outlive your money.
Buy and hold also may be a bad idea if you don’t have a lot of money to invest, as big pullbacks in equities can all but wipe you out — especially if you end up needing those funds while the market is down. That’s why after the 2000-2002 dot-com (“dot-bomb”) bubble, many market commentators, including author and Fox Business anchor Lou Dobbs, said, “You shouldn’t invest money in the stock market that you can’t afford to lose. Period.”
You may want to rethink the ‘4% rule’ too
Old rules of thumb are hard to let go of in any situation — and the financial industry is no exception. Another popular strategy dating back to the ’90s, designed to “ensure” that your money would last at least 25 years in retirement, is the “4% rule,” which says a 4% annual withdrawal rate from a typical portfolio should be a “statistically safe” amount, although not guaranteed to last a lifetime.
Recently, experts from a variety of sources have said the 4% rule is no longer realistic, mostly because of lower interest rates, longer life expectancies and recent markets showing much larger than normal corrections and recovery periods of five years or more. Some are now saying the percentage should be 3% or less. In 2013, the folks at Morningstar published research that found retirees who want “a 90% probability of achieving retirement income over a 30-year time horizon and a 40% equity portfolio” should withdraw just 2.8%.
Based on those numbers, if you had $1 million in assets, you would be safe to take out $28,000 per year. Most people likely would say that falls far short of what they’ll need in retirement.
Taking another direction instead
So, what else is there if you don’t want to run out of money and you need to use savings and investments to supplement your other guaranteed-income sources?
An increasingly popular strategy is to use a fixed-index annuity with a guaranteed lifetime income rider to create another dependable income stream to go along with your Social Security benefits and pension income.
These annuities do not directly participate in the market, but earn interest credited to the principal — capped at a certain amount — when the market goes up. Your principal is kept safe. You participate only in the market upside (up to the cap, but if the market rises above that, you wouldn’t share in those higher gains). You don’t lose principal when the markets pull back.
Because this is an insurance contract with guarantees and protections provided by the insurance carrier, it can be a good way to keep a portion of your assets safe. By adding an income rider, the carrier is able to guarantee your income for as long as you live and could pay out at a rate as high as 5% to 6% or more, depending on your contract terms and your age. There are almost always fees associated with riders offering guarantees, so it is important to understand how the fees work, including how they are calculated, if they can be changed during the contract period, and how they may impact the growth and death benefits of the contract. It is worthwhile to educate yourself on the costs and benefits to make sure they make sense within your retirement income plan.
If you haven’t heard about this type of annuity from your broker or adviser, it’s probably because it is not a security, it’s an insurance product, and doesn’t fit under the “Wall Street umbrella” or typify the normal brokerage-house model offering. More often, you will find these guaranteed-income products through independent financial advisers who also have an insurance license. Financial advisers are required to work as fiduciaries and have a legal obligation to put their clients’ interests first.
Bottom line: Don’t depend on old rules of thumb to get you through retirement. Keep an open mind and check into all the options available to you.
The market’s hotter than a pistol right now, leading many to argue stocks are too expensive. If that’s true, and I’m not saying it is or isn’t, doesn’t it at least make sense to take a closer look at your portfolio for money-losing stocks to sell?
Since President Trump’s election in November 2016, the Dow Jones Industrial Average is up more than 5,000 points and the S&P 500 is trading at 18.5 times earnings, almost 50% higher than the index’s long-term average.
We’re in the ninth year of a bull market and while some are suggesting it could carry on for another six to eight years, common sense suggests owning money-losing stocks at this stage of the game is unnecessarily putting your hard-earned money at risk.
I don’t believe regular investors should ever own money-losing stocks, especially if they’re held within a retirement account, but if you do own any of these seven stocks to sell now, at least reconsider why you own them.
You’ll be glad you did.
It wasn’t a pretty picture for Snap (SNAP) stock Nov. 8, after it laid a complete egg with its Q3 2017 earnings.
The social media company lost $443.2 million in the quarter from $207.9 million in revenue. It’s hard to understand anyone investing in a business whose revenues look like earnings and earnings look like revenues.
Evan Spiegel and company have it all backwards.
To make matters worse, the company behind Snapchat added just 4.5 million new daily active users in the quarter ended Sept. 30, an increase of just 3% over the second quarter. By contrast, Facebook (FB) increased its DAUs quarter-over-quarter by 3.8% to 3.7 billion.
Facebook did better than SNAP despite having 21 times as many users. That’s not a good sign when you’re losing $400 million a quarter.
I don’t care who you think is buying this company, SNAP’s a toxic stock you don’t want to own.
At the end of September, CNBCs Jim Cramer weighed in on Wayfair (W), the Boston-based online retailer of home furnishings.
It seems everyone’s got an opinion about the hotly contested stock, including short sellers who hold more than 25% of its stock.
“[Wayfair is] spending a fortune to grow in the hopes of taking over the furniture world,” Cramer said September 27 on Mad Money. “I wouldn’t go short or long this thing. I just think the whole thing is just too dangerous to play in.”
If you think it’s going to become the Amazon.com (AMZN) of furniture, you’ve got another thing coming; Ikea’s got a much better chance of success than Wayfair.
All the way back in October 2014 when Wayfair went public, I had five reasons to avoid its IPO. One of them was that it was losing money.
“Wayfair had an operating loss of $51 million in the first six months of 2014. Keeping all of the margins the same while inputing a $300 million marketing budget for the year, I expect it to generate an operating loss of $102 million or $1.23 per diluted share,” I stated October 14, 2014. “If it continues to spend 23% of every dollar of revenue on sales and marketing, it’s going to lose money indefinitely.”
I was wrong. Wayfair didn’t lose $102 million in 2014; it lost $148 million. It has lost $277 million in the two years since despite more than doubling top-line revenues. In Q3 2017, its operating loss was $74 million, 20% higher than a year earlier on a 40% increase in advertising.
The 20/40 rule isn’t going to make Wayfair profitable anytime soon, which makes it a stock to sell now.
Fitbit (FIT) is not looking very healthy at the moment. It coughed up a $113.4 million loss in Q3 2017 on a 22% decline in revenue. Not only that, but its gross margins were 330 basis points lower… not exactly the remedy for a stock that’s now below $6 and down more than 30% over the past 52 weeks.
About the only person that believes Fitbit’s got a fighting chance of surviving as an independent company is CEO and co-founder James Park who sounded weirdly optimistic in the company’s Q3 press release.
“We continue to execute on our transition plan by delivering on our financial guidance and product roadmap, positioning Fitbit on a path back to growth and profitability,” said Park. “We believe Fitbit Ionic delivers the best health and fitness experience in the category.”
When I last wrote about Fitbit in September, I was remarkably positive about its share price, suggesting that it likely wouldn’t drop much farther than where it was trading around $6; that’s exactly what has happened even after another money-losing quarter.
My rationale is that someone will come along and buy Fitbit for $9-per-share or three times its enterprise value. I still feel that’s going to happen, but unless you can afford for me to be wrong and it doesn’t get an offer, time is money that’s best spent elsewhere.
Blue Apron (APRN)
I feel like I’m Captain Obvious from the Hotels.com ads, but if you bought IPO shares in Blue Apron Holdings (APRN) and are still holding, you’re not very happy about it.
Down almost 70% from its $10 IPO in June, you’re probably wondering how you could have missed all the signs?
First, no one is making money in the meal-kit business. German-based Hello Fresh, which has a big presence in the U.S., lost $66 million in the first six months of the fiscal year on $505 million in revenue, while Blue Apron had $84 million in red ink on $483 million in revenue in the same period. And there are many other competitors.
However, the big sign you shouldn’t buy Blue Apron shares came June 16 when Amazon announced it was buying Whole Foods. That was a full 13 days before Blue Apron’s IPO. You had time to withdraw your commitment.
If there’s a company that can sustain losses building a business, it’s Amazon. Once they hooked up with Whole Foods, the writing was on the wall.
Blue Apron is a prime example of why you shouldn’t buy IPO shares in money-losing companies.
As Bud Fox (Charlie Sheen’s character in Wall Street) would say, “It’s a dog with fleas.”
Of all the stocks I’m recommending investors sell now, Fossil Group (FOSL) just might be the toughest call to make.
It’s not because I’ve got some attachment to the watch and jewelry manufacturer and retailer; rather, it’s just so difficult comprehending that Fossil was once valued at $6.6 billion (2013), 23 times its current market cap.
How can you possibly get back to that? You can’t, at least not without a miracle or two.
It has been a long time since I’ve followed Fossil competitor Movado Group (MOV), but I’ve attached an interesting article from 2015 that compares the two companies.
At the time, Fossil’s market cap was four times’ Movado’s. Today, Movado’s is double Fossil’s. Oh, how the tables have turned. But it’s not necessarily an endorsement of Movado, either. Movado might be a little more upscale and profitable than Fossil, but they’re both experiencing shrinking sales that might never come back.
If you must own a watch company, have the good sense to sell Fossil and buy LVMH Moet Hennessy Louis Vuitton SE ADR (LVMUY), which owns several high-end watch brands including TAG Heuer.
LVMUY isn’t going anywhere but up.
AMC Entertainment (AMC)
The Chinese conglomerate Wanda Group acquired AMC Entertainment Holdings (AMC) in August 2012 for $2.6 billion, including debt or 7.5 times EBITDA.
Wanda took AMC public the following December at $18-per-share or almost eight times EBITDA. Today, although it trades at less than $12, its enterprise value is $5.5 billion or almost 15 times EBITDA.
That’s a nice trick when you can double your multiple while losing money for shareholders. How can I get in on that action?
In 2016, AMC acquired Carmike Cinemas for $858 million and Odeon Cinemas, a European operator of movie theaters, for $637 million. The two acquisitions plus additional debt for future purchases added $1.8 billion in long-term debt to its balance sheet pushing its enterprise value higher. As of the end of September, AMC had $4.3 billion in long-term debt.
However, it now has over 1,000 theaters, almost three times as many as it had at this time last year. It’s definitely growing.
Why sell when its shares are near an all-time low?
Because you can do better with Cineplex Inc (CPXGF), Canada’s largest cinema company with 163 theaters generating almost as much in EBITDA from one-tenth the number of theaters.
Pandora Media (P)
I can’t believe that Pandora Media (P) is still around. Years ago when it was still an experiment, I used to listen to it, but once Spotify and other internet music services came along, I lost interest.
However, one look at its five-year operating history and it’s easy to see why. In fiscal 2012, it had operating losses of $11 million on $274 million in revenue. In the trailing 12 months, it had operating losses of $534 million on $1.5 billion in revenue.
No wonder its share price is under $5, well below its all-time high of $40.44 set in early 2014. Unless you’re an exceptional company, investors move on.
In June, Sirius XM Holdings (SIRI) bought $480 million in Pandora’s Series A preferred stock, which pays 6% annually and gives it the right to convert to common at $10.50-per-share. Pandora can’t redeem the shares until September 2020.
With the investment, Sirius XM gained two seats on the board and a 16% ownership stake based on the conversion of those shares.
So, why sell?
It might take three years or more for Sirius XM’s investment to deliver more than a reasonable dividend payment for its investors. The $480 million it has put into Pandora is chump change. Whether Pandora lives or dies isn’t going to affect SIRI stock.
Sirius XM obviously feels Pandora’s worth no more than $10.50 per share or the two parties would have agreed to a buyout.
In the meantime, Pandora continues to lose buckets of money. The opportunity cost is too high. If you like Pandora, sell it, and buy SIRI.
Part of the beauty of buy-and-hold investing is its simplicity. The market always has occasional pullbacks and crashes, but the long-term trend has always been up. A high-quality company with an extensive track record of success and reasonably priced (or even cheap) shares will go along for the ride, if the investor is patient enough.
Just because stock valuations are high doesn’t mean they can’t still go up from here.
In the shadow of the Dow Jones Industrial Average’s 27% runup over the past year, investors are understandably hesitant to plow into stocks as they tiptoe to new record highs. We’ve simply gone a little too long without a decent correction in the Dow Jones’ component stocks, and one could be in the offing with little to no warning.
This bull market never stops charging. Now in its ninth year, the current winning streak has delivered a 342% cumulative gain in Standard & Poor’s 500-stock index since its 2009 low. In 2017 alone, the Dow Jones industrial average has hit a new record closing high more than 40 times.
Stocks with long track records of annual dividend increases offer investors a sense of comfort. Shareholders can all but count on their income going on – and going up – year after year. With a little creativity, income investors can extend this sense of security to a month-by-month basis, as well.
Tech stocks weren’t born during the dot-com boom of the 1990s. In fact, many of today’s biggest publicly traded technology companies got their starts decades earlier. One of the most storied names in Big Tech dates back more than a century.
With stocks in the stratosphere, many investors have happily put off rebalancing as they watch their portfolios rise. Those same investors won’t be smiling when stocks fall back down to earth. It could be time to do some strategic selling.