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What's new on the web: buy and hold investor derailed |
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Page 1 of 2  In our commentary this week on financial news on the internet, always from the viewpoint of the do-it-yourself investor, we return to the case of a self investor which received a lot of media attention. The investor, Derek Foster, at the worst of the financial crisis, liquidated his entire buy and hold portfolio. What lessons can we learn six months later?
Derk Foster
Thanks to a substantial and well performing stock portfolio, Mr. Foster had supposedly retired at age 34. He then proceeded to publish three books showcasing how its investment strategy for the long term would ensure a comfortable retirement. He surprised many when on 12 March he announced that he had liquidated all his holdings:
In early February, he sold everything he owned in his online brokerage account - $ 472.000 worth of stocks and income trusts - and moved into cash. "I think we're in for more pain," he says when explaining his abrupt about-face. "My strategy was to buy quality dividend-paying stocks and hold them through thick and thin." I held on all last year, but I've been doing lots of research and I do not think we're close to the bottom yet . Source: Ellen Roseman, Toronto Star 12 03 2009
Six months later, this panic selling seems to have yielded very poor results. Between 2 02 2009 and 6 08 2009 the Toronto Stock Exchange composite index rose from 8.624 to 10.793, or 25%. Mr. Foster has missed this substantial increase.
Capitulation
There is an investment theory called capitulation; see Wikipedia
and Investopedia .
According to this theory the time to buy stocks is when there are panic market sales. At this point the end of the bearish cycle has arrived and prices have reached a floor. It appears that Mr. Foster unwittingly sounded the end of the bear market.
Our site does not believe in the virtues of market timing as an approach to investing. Our approach ironically looks more like Mr. Foster’s original philosophy But he did not stay the course, and it has probably cost him a lot of money. But was all this inevitable? We do not believe so.
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Last Updated ( Tuesday, 06 October 2009 )
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