One of the oldest, easiest, and most trusted investment strategies may no longer be safe in this new era of volatility.”Buy-and-hold doesn’t work anymore,” said MIT’s Andrew Lo in an interview with Money Magazine‘s Charles Wallace.
Lo offers more colour:
The volatility is too significant. Almost any asset can suddenly become much more risky. Buying into a mutual fund and holding it for 10 years is no longer going to deliver the same kind of expected return that we saw over the course of the last seven decades, simply because of the nature of financial markets and how complex it’s gotten.
Lo attibutes the riskier nature of these markets to the proliferation of high-risk/high-reward hedge funds and derivatives in the markets, the activities of which he compares to “clearing brush with a chainsaw.”
You can clear a lot more brush using a chainsaw [than a handsaw], but you might lose a finger. We now have everybody with chainsaws going after all sorts of opportunities, and that’s really where the potential for crises can emerge.
So what’s his alternative?
There aren’t many good ones. The only real strategy, he says, is to diversify very broadly: stocks, bonds, currencies, commodities. Domestic and international. Funds with lower fees are also good. And he says to “try to manage the volatility within a reasonable range.”
“Most of us didn’t sign up for the kind of volatility we’re seeing right now,” he says.
You can read the whole interview in the current issue of Money Magazine.