The glitch that shut down the Nasdaq for a few hours on Aug. 22 apparently made a few investors think about shutting down their trading and investing activity.
It wasn’t the Nasdaq glitch – which the exchange took responsibility for – so much as it was a statement by the legendary investor Warren Buffett that I broke out in explaining how investors might look at a market blackout.
Buffett has said that he buys investments “on the assumption that they could close the market the next day and not reopen it for five years.”
“So,” wrote Bill R., a 30-something investor in Weymouth, Mass., whose note spoke for a number of other readers of a similar mind, “How would someone invest if they thought the market was going to be shut down for the next five or 10 years? I think that would be a great way to invest and not worry about the market every day, but would it be different from what I do now?”
That’s an interesting question, because modern technology has made it so easy for investors to connect with the market that being disconnected almost certainly would take some strategies off the table.
Buffett has famously said that his favorite holding period is forever, but for all of the posturing, his average holding period is judged by most observers to be somewhere in the four- to four-and-a-half year range.
The disconnect between what Buffett says and what he does is not egregious; his favorite holding period may be “a lifetime,” but not every investment lives up to favorite status.
(In fact, that statement would apply to my own investment philosophy and portfolio.)
And while he may make acquisitions as if a five-year market shutdown is imminent, the reality is that – with the exception of the occasional glitch – the market isn’t going anywhere, so he doesn’t need to wait around, handcuffed to his mistakes.
Investors who want to “set it and forget it” — building a portfolio as a shutdown is coming — might want to start by eliminating investments before picking what works.
“That long-term time frame means you have to find things that you are confident will be up in five years, but you have the benefit of not watching them be volatile on the way,” said Charles Mizrahi, editor of Hidden Values Alert. “But what you do not want is anything that’s a gimmick, or that is supposed to make money based on the volatility rather than making money because in five or 10 years it’s worth more than it is today.”
That means you can get rid of most of the hedge-fund, absolute-return and market-neutral strategies in mutual funds, toss out the leveraged exchange-traded funds and most of the attempts to turn “alternative investments” into products for mainstream investors. Those efforts — when successful — often try to thrive on volatility that is irrelevant if trading isn’t allowed.
By comparison, a target-date fund would be a viable default option, just as it is for most retirement investors who simply don’t want to deal with the market’s maneuverings as they slowly try to amass a nest egg.
The time constraint on trading doesn’t hurt the logic behind indexing either; if you believe the market will be up in five or 10 years, having an index fund ensures you’ll participate in that long-term move.
You also could get rid of trendy stocks, companies with quick-changing technologies or in businesses that could become obsolete in favor of clear industry leaders and solid-if-unspectacular companies in industries that aren’t going anywhere, the kind that pass a screen of “What can I buy today that I would not worry about for five years?” Companies such as Tesla Motors (TSLA) or LinkedIn (LNKD) may feel like sure things to giddy investors right now, but the competitive pressures and emerging technologies of their respective industries make it clear that they’re not the kind of issue that you can buy and forget about.
You’d spread your money around and diversify, because knowing that you are locked into the portfolio for five years would mean that you would not want any one mistake to blow you up while it festers during your lock-up period. You’d make sure your bond holdings were spread around to guard against what will happen when rates rise further.
You’d focus on what you need to have in the portfolio at the point when you are allowed to open your eyes and start trading again. Dan Dorval, president of Dorval & Chorne Financial Advisors in Maple Grove, Minn., noted that Buffett gets to focus on “buying an investment without any personal goal; his focus is entirely on producing the greatest possible return for his shareholders,” but individuals with bills to pay don’t have that luxury.
Seth Masters, chief investment officer for Bernstein Global Wealth Management, said on my radio show recently that he expects the Dow to hit 20,000 in 2018, roughly five years hence. Given where the market is at, that represents a gain of about 35 percent from current levels, or roughly 7 percent per annum. That’s not some big stretch.
A lot of people would be pretty happy to take the Buffett philosophy and just have things shut down if they could wake up in five years to Dow 20,000.
Ultimately, those investors don’t need a shutdown to act like there is one; they can take the Buffett-like approach of looking for the big picture, but changing their mind when the “favorite” strategy isn’t paying off.
It’s not that different than what many investors do now, except that it puts the focus on “What happens next?” rather than “What have you done for me lately?”Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at Box 70, Cohasset, MA 02025-0070.