Buy and hold stalls: big tech portfolios down 50%
Investors sitting on losses of 50% to 60% in major US tech stocks reopen the debate: buy and hold doesn't fail, it's applied badly when you buy at market highs.
English · Original discussion in Spanish · Published
Buy and hold stalls as tech holdings sink 50% into the red
There are portfolios that hurt to look at. Clients who bought in convinced that time heals everything are now watching their positions in big US tech stocks pile up losses of 50% and even 60%. The diagnosis doing the rounds is uncomfortable: buy and hold hasn't failed, but it has been applied badly. Buying whatever has risen the most at its peak and calling it a long-term strategy is an elegant way of chasing prices.
The first reaction in the exchange of analysis was to point out the textbook error: buy and hold is measured in years, not in a single year. Anyone who bought Amazon, Meta, Apple, Microsoft, Nvidia, Netflix or Tesla at the crest of the wave isn't doing buy and hold, they're doing momentum under the excuse of investing. And the difference between the two, when the market turns, is what separates a correction from a bloodbath.
What separates buy and hold from buying at the top
The most repeated argument is that the strategy doesn't promise an absence of drawdowns, but rather accepting them. An investor who has been in the Nasdaq since 2010 is still sitting on a 400% gain, dividends aside. Another who started with regular contributions in 2011 has accumulated gains of up to 200%. The key isn't the index, it's the entry price and the discipline of not selling when the red appears on the screen.
The problem arises when the retail investor confuses the strategy with the asset. Buy and hold on a company with solid fundamentals and dividends is not the same as doing it on a growth stock trading at dizzying multiples. The comparison that forces itself on us is between someone holding a telecom or an energy company and someone who jumped on the fashionable stock at its very highest point.
DCA doesn't erase losses, it spreads them out
The most technical defence from the systematic investor is that regular contributions dilute the blow. With DCA, instead of losing 60% of €20,000, you lose 30% of €40,000 or 15% of €80,000. The absolute figure may be larger, but the percentage of the portfolio is smoothed out. It's a way of buying high and low without timing the market, which is exactly what the strategy aims to do.
Even so, some warn that DCA is not a vaccine. If the market enters a long bear cycle, contributions keep going into an asset that keeps falling and the result takes years to straighten out. Patience, in that scenario, stops being a virtue and becomes a test of psychological endurance.
The market floor: from 1,600 to 4,100 points
The question nobody can answer with certainty is where the fall ends. The scenarios being floated for the S&P 500 range from 3,200 points in the most optimistic version to 1,600 in the most pessimistic, passing through 2,700 and 2,200. The range is so wide that it confirms the obvious: nobody knows. What can be read is the structure of the chart, and as long as the highs and lows keep making lower peaks, the trend is bearish.
The technical criterion being proposed is to wait for the index to break above its last significant high, around 4,100 points, to confirm a trend change. The trade-off is obvious: you give up the first part of the rally. The debate between entering in steps or waiting for the signal is the old tug-of-war between the antiestéticar of missing the rebound and the antiestéticar of taking another fall.
Rates and liquidity matter more than charts
The macroeconomic analysis points to two forces pushing prices down: the Federal Reserve's balance sheet, which keeps shrinking and draining liquidity from the system, and interest rates that will presumably stay high for some time. With more expensive money, indebted companies struggle to refinance and corporate earnings suffer. The recession that hasn't yet arrived would be the missing ingredient to bring inflation under control.
Against that narrative, the opposing thesis holds that the bottom has already been seen and that the 25% drop in the first three quarters of 2022 was correction enough. Time will tell who is right, but the discussion leaves one clear idea: buy and hold is not a religion, it's a strategy that requires distinguishing between the asset you buy and the price you pay for it.
There are portfolios that hurt to look at. Clients who bought in convinced that time heals everything are now watching their positions in big US tech stocks pile up losses of 50% and even 60%. The diagnosis doing the rounds is uncomfortable: buy and hold hasn't failed, but it has been applied badly. Buying whatever has risen the most at its peak and calling it a long-term strategy is an elegant way of chasing prices.
The first reaction in the exchange of analysis was to point out the textbook error: buy and hold is measured in years, not in a single year. Anyone who bought Amazon, Meta, Apple, Microsoft, Nvidia, Netflix or Tesla at the crest of the wave isn't doing buy and hold, they're doing momentum under the excuse of investing. And the difference between the two, when the market turns, is what separates a correction from a bloodbath.
What separates buy and hold from buying at the top
The most repeated argument is that the strategy doesn't promise an absence of drawdowns, but rather accepting them. An investor who has been in the Nasdaq since 2010 is still sitting on a 400% gain, dividends aside. Another who started with regular contributions in 2011 has accumulated gains of up to 200%. The key isn't the index, it's the entry price and the discipline of not selling when the red appears on the screen.
The problem arises when the retail investor confuses the strategy with the asset. Buy and hold on a company with solid fundamentals and dividends is not the same as doing it on a growth stock trading at dizzying multiples. The comparison that forces itself on us is between someone holding a telecom or an energy company and someone who jumped on the fashionable stock at its very highest point.
DCA doesn't erase losses, it spreads them out
The most technical defence from the systematic investor is that regular contributions dilute the blow. With DCA, instead of losing 60% of €20,000, you lose 30% of €40,000 or 15% of €80,000. The absolute figure may be larger, but the percentage of the portfolio is smoothed out. It's a way of buying high and low without timing the market, which is exactly what the strategy aims to do.
Even so, some warn that DCA is not a vaccine. If the market enters a long bear cycle, contributions keep going into an asset that keeps falling and the result takes years to straighten out. Patience, in that scenario, stops being a virtue and becomes a test of psychological endurance.
The market floor: from 1,600 to 4,100 points
The question nobody can answer with certainty is where the fall ends. The scenarios being floated for the S&P 500 range from 3,200 points in the most optimistic version to 1,600 in the most pessimistic, passing through 2,700 and 2,200. The range is so wide that it confirms the obvious: nobody knows. What can be read is the structure of the chart, and as long as the highs and lows keep making lower peaks, the trend is bearish.
The technical criterion being proposed is to wait for the index to break above its last significant high, around 4,100 points, to confirm a trend change. The trade-off is obvious: you give up the first part of the rally. The debate between entering in steps or waiting for the signal is the old tug-of-war between the antiestéticar of missing the rebound and the antiestéticar of taking another fall.
Rates and liquidity matter more than charts
The macroeconomic analysis points to two forces pushing prices down: the Federal Reserve's balance sheet, which keeps shrinking and draining liquidity from the system, and interest rates that will presumably stay high for some time. With more expensive money, indebted companies struggle to refinance and corporate earnings suffer. The recession that hasn't yet arrived would be the missing ingredient to bring inflation under control.
Against that narrative, the opposing thesis holds that the bottom has already been seen and that the 25% drop in the first three quarters of 2022 was correction enough. Time will tell who is right, but the discussion leaves one clear idea: buy and hold is not a religion, it's a strategy that requires distinguishing between the asset you buy and the price you pay for it.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (59 replies).
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