Author Topic: "Buy and Hold" vs. Market Performance  (Read 4026 times)

APowers

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"Buy and Hold" vs. Market Performance
« on: January 14, 2016, 10:24:08 AM »
Maybe this is Off Topic, but here seemed as good a place as any. So here goes:

What effect does a "buy and hold"* investing strategy have on the market value as a whole? Obviously, one individual won't make a material difference, but what if everyone did it? Would it depress/devalue the market? Would it drive the market up artificially? Or would it have no effect?

*By "buy and hold" I mean buying shares of, say, VTSAX (total market index, and not selling them until decades later (say, for my kids at birth until they're 18).

Secondary question: Does it really matter who holds those shares that are being bought and held? Does it make a difference if they are private individuals vs. the gov't?

tarheeldan

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Re: "Buy and Hold" vs. Market Performance
« Reply #1 on: January 14, 2016, 10:30:52 AM »
Buying pressures prices upwards on the margin. Selling does the opposite. Holding is neutral. Prices don't care who buys/sells.

tj

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Re: "Buy and Hold" vs. Market Performance
« Reply #2 on: January 14, 2016, 10:31:22 AM »
Quote
Obviously, one individual won't make a material difference, but what if everyone did it?

They wouldn't. Too many people are too greedy and too confident in their ability to outperform. "What if everybody indexed?" is a misnomer because it would never happen.

PathtoFIRE

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Re: "Buy and Hold" vs. Market Performance
« Reply #3 on: January 14, 2016, 10:51:28 AM »
Right, maybe a better question is "what effect does a large number of 'passive' buy/hold investors have on those at the margins looking to buy/sell"? Framed that way, it's harder to imagine much effect. I guess at some point there could be so few active traders at any given particular moment, that we could see prices swings (volatility) increase, but that still doesn't explain or argue for any change in behavior on the margins (buyers being more picky -> lower prices; sellers being more picky -> higher prices).

Pooplips

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Re: "Buy and Hold" vs. Market Performance
« Reply #4 on: January 14, 2016, 10:59:21 AM »
If a large pool of investers all invested the same way it most likely would create some additional systemic risk.

The thing about buy/hold investing is that there is a time component. My parents were buy/hold investors, but, now that they are entering retirement they are more of a hold/sell investor. Its not an easy question to anwser. I tend to look more at demographics. The baby boomers are going to be putting alot of sell side pressure on the stock market over the next 20 years.

The good thing is I plan on accumulating over that same time frame ;)

APowers

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Re: "Buy and Hold" vs. Market Performance
« Reply #5 on: January 14, 2016, 11:05:48 AM »
I'm asking this because I suggested that the gov't could implement a Universal Basic Income by index investing ~$7k per year for each newborn child, and it'd be a slow phase-in of a UBI for the entire population. I was told that "You'd wind up with the government effectively owning a huge chunk of the private economy and investment yields would likely be driven down significantly with that amount of capital sloshing around."

But would investment yields actually be driven down? I was under the impression that
Prices don't care who buys/sells.
Am I wrong here?

tarheeldan

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Re: "Buy and Hold" vs. Market Performance
« Reply #6 on: January 14, 2016, 11:17:50 AM »
I'm asking this because I suggested that the gov't could implement a Universal Basic Income by index investing ~$7k per year for each newborn child, and it'd be a slow phase-in of a UBI for the entire population. I was told that "You'd wind up with the government effectively owning a huge chunk of the private economy and investment yields would likely be driven down significantly with that amount of capital sloshing around."

But would investment yields actually be driven down? I was under the impression that
Prices don't care who buys/sells.
Am I wrong here?

So, when I go to buy a share of something, I pressure prices upwards. Doesn't matter who I am.

As for the response that someone gave you, I don't think that makes much sense, especially in the context you give where the government buys broad index funds. Governmental pension systems (e.g. calpers) are huge buyers for instance, and this doesn't - to my knowledge - dampen yields or pose any reason to think that yields should be pressured lower. Did they provide any kind of reasoning behind the statement? Even if the government bought shares of individual companies I don't see any way the argument makes sense except you could argue the company would be marginally more likely to be bailed out.

As for this timing thing of where people are in their lifecycle and whether they are net buyers/sellers along that path, I am under the impression that this kind of behavior has little impact on price fluctuations relative to speculative and/or other more active trading.

APowers

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Re: "Buy and Hold" vs. Market Performance
« Reply #7 on: January 14, 2016, 01:17:51 PM »
I said:
Quote
Why would gov't ownership of stock drive down yields any more than anyone else owning all that stock (which is already owned, just not by the gov't)?
He said:
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Same reason the huge amounts of cash floating around right now are keeping yields down. At least with debt instruments, having a bigger buy side means lower yields. Anything managed by the government would almost certainly have to be low risk, making debt a big piece of whatever portfolio they would assemble.

tarheeldan

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Re: "Buy and Hold" vs. Market Performance
« Reply #8 on: January 14, 2016, 01:21:23 PM »
I said:
Quote
Why would gov't ownership of stock drive down yields any more than anyone else owning all that stock (which is already owned, just not by the gov't)?
He said:
Quote
Same reason the huge amounts of cash floating around right now are keeping yields down. At least with debt instruments, having a bigger buy side means lower yields. Anything managed by the government would almost certainly have to be low risk, making debt a big piece of whatever portfolio they would assemble.

Doesn't that just mean that if people (in this case the government) buy a crap-ton of bonds, then the price is bid up and so the yields are bid down? That's got nothing to do with who buys it and is a no-brainer. And anyway you were talking about equity-based indexes right?

MustacheAndaHalf

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Re: "Buy and Hold" vs. Market Performance
« Reply #9 on: January 14, 2016, 06:41:22 PM »
When you say what if "everyone" practiced buy/hold, I assume you mean individual investors.  There's also educational endowments like Yale or Harvard, who have tremendous advantages.  They control billions, have a staff of dozens, and are tax-exempt organizations.  They can trade daily with no taxes using an expert staff, so I'm not sure how you'd convince them to stop doing so.

There's other institutional ownership as well, and hedge funds, so there's no shortage of market participants.  Actually if all individuals bought and held it would have far less impact than if all the hedge funds did so, or all institutional investors.

Retire-Canada

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Re: "Buy and Hold" vs. Market Performance
« Reply #10 on: January 15, 2016, 06:39:23 AM »
What would happen if everyone in the market B&H?

Just look around this forum...you'd expect it was a bastion of B&H, but we have tons market timers and crystal ball readers who believe they have the "magic" to outperform the market consistently for decades and outwit the hapless buy and hold indexers.

NoStacheOhio

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Re: "Buy and Hold" vs. Market Performance
« Reply #11 on: January 15, 2016, 08:24:22 AM »
Ignoring institutional investors for a moment, wouldn't the fact that you have a bunch of people at different stages offset any lopsided B&H effect? People who are accumulating would be buying (and holding) people who are done working would be holding/selling. I know it's not 1:1, but it's not nothing.

Aphalite

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Re: "Buy and Hold" vs. Market Performance
« Reply #12 on: January 15, 2016, 12:12:01 PM »
I said:
Quote
Why would gov't ownership of stock drive down yields any more than anyone else owning all that stock (which is already owned, just not by the gov't)?
He said:
Quote
Same reason the huge amounts of cash floating around right now are keeping yields down. At least with debt instruments, having a bigger buy side means lower yields. Anything managed by the government would almost certainly have to be low risk, making debt a big piece of whatever portfolio they would assemble.

He (whoever he is) is right. You're thinking about a non-realistic scenario where everyone buys and then holds, never selling to pay for bills or because they want to, he's at least looking at it from the rational angle of, "what if the government bought (less than a controlling majority of) private equities for use in a UBI (which by the way is asinine, but that's another discussion), therefore BACKDOOR GUARANTEEING ITS SAFETY THROUGH THE TAXING POWER LAID OUT IN THE CONSTITUTION what would happen to the yields?" The answer, as he lays out, is that the perceived risk of the equities purchased by the government would be lowered, and asset prices would be driven up and the yield congregates to the risk free rate (treasury rate)

Your opening question and the question he is answering have nothing in common. Your opening question scenario would never happen in any circumstance. Even if the stock exchange was closed tomorrow due to a heavy terrorist attack, people would still be trading securities, just not on the stock exchange. They could do it in person out on the street, for example, offering to sell their shares for XX or buy someone else's shares for XX. There would no longer be a universally visible quoted price, but I think for most people that might actually be a great thing - helping to mask the deficiencies of the human psyche that push a lot of people towards trading instead of investing