August 22, 2010

White Paper: Buy-and-Hold Has Failed; Dividends Preferable

Schreiber calls for return to dividend-based investing strategy

According to a white paper released by WBI Investments, "The Unconventional Dividend Based Investment Approach," the strategy touted so much over the years to investors to buy and hang onto stocks within their portfolios is no longer valid - indeed, has caused substantial losses over the most severe of market downturns. Instead, what is needed, says the paper, is a return to an investment in dividend-paying stocks, which are in general less volatile and offer a more secure and regular rate of return than relying on increases in the share price of growth stocks.

WBI is an RIA firm based in Little Silver, New Jersey, where founder Don Schreiber is president and CEO.

Through the use of numerous graphs and charts, the paper demonstrates its assertion. First, the groundwork is laid with a chart that shows the market's ten best- and worst-performing quarters over the past 55 years; another demonstrates what returns would be on a hypothetical portfolio if the investor had missed the ten worst or ten best quarters, both of those periods, or had ridden them all out with buy and hold. Another chart shows the length of up and down cycles in the Dow Jones Industrial Average ("Over the past century . . . these secular cycles have lasted 17 years on average.") and further asserts, "Investors following the conventional buy and hold approach would have spent twenty-four years, much of their adult life, waiting to get back to even."

It adds that the assumption that individuals can adopt an institutional buy-and-hold strategy is flawed. Indeed, it says, "Individual investors are genetically predisposed to lose the buy-and-hold battle." Human nature and survival instincts, it says, will dictate that when an investor sees he is losing his precious nest egg he will flee the markets before he loses all, and, wary of additional downswings, not reenter until he sees it has recovered substantially - a clear reversal of "buy low, sell high."

Instead, the paper recommends a threefold strategy: first, focusing on value to help "buy low" and selling when the investment gains (rebalancing and harvesting gains); next, investing enough in dividend-producing stocks that will allow investors to "collect a significant cash flow from dividends that is not dependent on [stock] price appreciation"; and third, using a "dynamic trailing stop-loss process."

Read the complete paper here.

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