According to Indian mythology, Bramhastra never fails. It is a sure shot way to win a battle.
In investment parlance, most experts swear by buy and hold strategy and strongly believe that it will never fail.
I am also a big fan of buy and hold strategy. But deep-dive research done by our team shows us a very different picture. Buy and hold does work and continues to remain one of the best strategies in wealth creation but with a caveat! Like most important question of life, even the answer to this question is both ‘Yes’ and ‘No’.
Buy and hold still remains the best strategy if you do not have any cash flow requirement. But if you have to take out even a small portion of money because of some emergency then buy and hold may not work. Remember, investment is not complete without disinvestment. Basically, investment is just one leg to a transaction and unless it is disinvested the second leg of transaction is not completed.
How has buy and hold fared in a situation where investors needed for example regular income post-retirement?
Here are the assumptions:
1. Investors start with a capital of say Rs. 1 crore
2. The entire Rs. 1 crore is in equity as on April 1 of any financial year
3. Investors take out 8% of this corpus (Rs.1 cr X 8%= Rs.8 lakh) to meet their expenses in monthly instalment of Rs.66667/- (Rs. 8,00,000/12)
4. The monthly withdrawals increases by 6% per annum to account for rise in inflation
5. The start date is April 1 and starting year was 1980 and then investor could have started in any year from 1980 till 2020
6. Results are on BSE Sensex without considering the dividend yields
Here are the results of our research:
Investors created huge wealth and were also able to fund their retirement needs for minimum of 20 years post their start period. These years can be termed as great years. If investors started in any of the following years, then the results are very satisfactory:
From 1980 to 1991 = 12 years
From 2001 till 2005 = 5 years
From 2012 till 2020 = 9 years
Years with satisfactory results = 26 Years
Challenging Years
Start Year Corpus got over by
1992 Oct 2009 (in 17 years)
1993 Feb 2007 (in 14 years)
1994 Dec 2002 (in 8 years)
1995 July 2005 (10 years)
1996 Jan 2008 (12 years)
1997 Jan 2011 (14 years)
1998 Feb 2011 (13 years)
1999 Sept 2016 (17 years)
2000 Feb 2013 (13 years)
2006 May 2020 (14 years)
2007 Jun 2020 (13 years)
2008 Feb 2020 (12 years)
2010 Rs.34 Lakh left
2011 Rs. 50 lakh left
Years with challenging performance are 14 in total. So out of 40 years, 14 years i.e. 35% of times, the performance of the portfolio remained challenging.
So, buy and hold does work in majority of times but past data shows that it does not work 1/3rd of the time.
In short, even if an investor needs a small portion from his invested amount, there is 35% chance that he will run out of money.
Why does this happen. It is just the reverse of SIP. SIP does extremely well when market is in bear phase. On the contrary, if someone does SWP during bear phase then more units are redeemed.
In a way, market timing does matter but no one get the market timing right consistently.
To overcome this, investors should have a good financial advisor on their side to create strategies or follow asset allocation model.
Vijai Mantri is Chief Investment Strategist and Co-Promoter, JRL Money. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
