mutual funds and exit strategy

[m3racer]

Doesn't it make sense to have an exit strategy even if we're talking about mutual funds in a retirement account? The "buy & hold" theory seems flawed to me. Any thoughts?

[Like2Plan]

It does seem to me that most of the info out there is targeted toward saving and building retirement savings with very little info about how you manage to draw the money out without taking a hit...

[GREENBACK]

Why does buy and hold seemed flawed? Are you going to try to time the market? Do you have the many hours and knowledge it takes to thoroughly research your investment choices in the thousand of funds out there(you have professionals to do this for you in a MF) before making decisions on moving your money. If the answer is no, then buy and hold MF's are a good strategy from what I can tell. Buy and sell is for individual stocks and those with lots of cash to lose.

I see no better strategy for mutual funds than buy and hold(not the same as buy and forget!). My exit strategy is retirement. What is the flaw you see?

[Broken Arrow]

Can you be more specific in regards to these "flaws"?

Depending on exactly how you define "exit strategy", Buying and Holding does have a sell strategy of sorts. It's just called under a different name: Rebalancing.

However, it's worth emphasizing here that rebalancing is a strategy that deals with asset allocation based on certain personal preferences, rather than attempting to time the market somehow.

I think the problem comes in when people start to apply "exit strategy" towards the market at large, or worse, believe that perhaps it is possible to time the market somehow....

But then Buying and Holding also has its own passive form of buying strategy as well, that again, does not take market timing into account. And we often know that under a different name as well: Dollar Cost Averaging....

[disneysteve]

It does seem to me that most of the info out there is targeted toward saving and building retirement savings with very little info about how you manage to draw the money out without taking a hit...

I think this is changing. More and more, I'm seeing financial publications like Money, Kiplinger and Smart Money do stories on managing investments IN retirement. As the baby boomers age, I think that will become even more common. We are the first generation to really be responsible for funding our own retirement and we're going to need guidance along the way, how best to draw from our various accounts (401k, Roth, IRA, taxable accounts, etc.).

[blankcheck]

Well, the basis behind "buy and hold" is to give a layperson with no interest in active investing to maximize their chance of earning an overall rate of return. Certainly, this is flawed. However, if a person doesn't have interest in directly managing their mutual funds on a monthly basis, then there is little alternative besides cash, metals, and individual bonds.

Sure, a person can place a stopgap on any investment (if share price drops to X, then sell, and it's an excellent strategy if you know things are in the tank, like an individual stock holding in Enron), but then, if it's a mutual fund (especially a broad market one) what to do with that money? Buy in something that the person suspects is going to do better right now? Put it more into cash/gold/etc? That's changing asset allocation. Wait until the market gets better? That's timing the market. None of these strategies has any fewer flaws than "buy and hold" does.

I will say this: the current market has shown to me, amongst my coworkers and friends, that most of them are fair weather investors; they'll follow any philosophy as long as it was making money for them. The second that it slows down or depreciates, then they look for the next best thing. I thought the whole point about education regarding these things was to avoid acting on these emotional responses.

[scfr]

I do plan to gradually shift my asset allocation away from stocks, starting at age 50. I'm going to develop my plan shortly before hitting the half-century mark, so this number will probably change, but currently my hope is to be only 10-20% in stocks by age 65. I'd like to have enough saved by retirement age so that I can feel confident in maintaining my standard of living without relying on the whims of the market.

I'm not clever enough to try to market time my way out of the stock market. I'll develop a plan where on a predetermined date each year (I already know the date believe it or not ... and it's already written on my calendar), I shift my investments to a more conservative mix.

If that is what you mean by "exit strategy," then yes, I think it makes perfect sense to have one.

[Broken Arrow]

Well, the basis behind "buy and hold" is to give a layperson with no interest in active investing to maximize their chance of earning an overall rate of return. Certainly, this is flawed. However, if a person doesn't have interest in directly managing their mutual funds on a monthly basis, then there is little alternative besides cash, metals, and individual bonds.

Sure, a person can place a stopgap on any investment (if share price drops to X, then sell, and it's an excellent strategy if you know things are in the tank, like an individual stock holding in Enron), but then, if it's a mutual fund (especially a broad market one) what to do with that money? Buy in something that the person suspects is going to do better right now? Put it more into cash/gold/etc? That's changing asset allocation. Wait until the market gets better? That's timing the market. None of these strategies has any fewer flaws than "buy and hold" does.

I will say this: the current market has shown to me, amongst my coworkers and friends, that most of them are fair weather investors; they'll follow any philosophy as long as it was making money for them. The second that it slows down or depreciates, then they look for the next best thing. I thought the whole point about education regarding these things was to avoid acting on these emotional responses.

For those with no interest in investing, and even for many of us that do, that's why I recommend funds like Target Retirement/Lifecycle/Freedom type funds. They require the least amount of input from the investor, and will automate asset allocation and rebalancing for you.

These types of funds are certainly not without their flaws, but their effectiveness should not be underestimated. The biggest advantage of such fire-and-forget funds is that it passively discourages people from mucking up their own asset allocation; be it through fear, greed, the belief they can out-smart the market, or some other less-than-logical reasoning.

So, again, it's not so much that people can't come up with better asset allocations for themselves, but just that these funds help insulate the investor from making grave investing errors, especially for those who have very little interest in investing.

Despite my own personal interest in investing, my new 401(k) is 100% into Fidelty Freedom fund. I don't know if I'll keep it that way forever, but I am very comfortable with that decision.

[kgloh_23]

I don't understand what you mean by buy and hold?
But mutual fund is manage by professional fund manager.
you go to mutual fund mean you ready for investment. The only strategy of investment is only 2 words. "NO FEAR" and "NEVER GREED".
No one will know when the market will go to the top or reach the bottom, and mutual fund is advise to be your long term investment and regular investment for cost averaging purpose, the only winner is only sell when market is high. But most of the people fail to do so because they "FEAR" and "GREEDY".
For mutual fund, you need frequently review your portfolio, if you make money, you can adjust to shift some of your fund to low risk, and if the percentage of your equity fund going down, you can shift some of low risk fund to more aggresive fund to rebalance your portfolio.
For advise, since mutual fund is middle to long term investment, it is remind you to have emergency fund to manage your emergency need. This can avoid you loss from investment.

[m3racer]

I view "market timing" and having an "exit strategy" as 2 different concepts that can be confusing. The former is self-explanatory. The later allows you to minimize losses and forces you to take a profit. It helps take out some of the emotional component to investing IMO. For example, if I purchased $3000 worth of NAVs in a mutual fund at $30/NAV. Shouldn't I predetermine the amount of losses I'm willing to see before I purchase. The "buy & hold" theory doesn't set a bottom price. You could losee a significant amount of $$. Likewise, shouldn't I take a profit once the $/nav hits a certain $ amount? Like maybe the amount that I originally invested? Now I would be playing with the "House's $$."