Forex in this article
indices in this article
The crypto market is in a weak phase
HODL strategy is not a sound investment strategy
Important difference between average return and actual return
The crypto market is currently in a definite phase of weakness. While Bitcoin was able to set a new record high of almost $ 70,000 in November last year, it is currently hovering around $ 20,000. Many investors have been hit hard by this new crypto winter. Nevertheless, many pursue the “HODL” strategy, that is, they keep their cryptocurrencies – whatever. The term “hODL”, which stands for holding cyber currencies, goes back to a user post in a Bitcoin forum where a user used the wrong word “hodl” instead of the English term “hold” and thus went viral. Since then, the concept has found a firm place in cryptoverse.
“Buy and hold” – completely carefree?
The “buy and hold” investment strategy is not only popular among cryptocurrencies. Especially in the weakness phases of the stock market, there are always various experts pointing out to investors that it would benefit them in the long run if they simply awaited the slowdown and remain invested. It criticizes RIA Advisors strategist Lance Roberts in an article on the company’s website. In it, he describes how he recently received the following advice from a Wall Street firm: “Despite the decline earlier this year, investors should not panic. In the long run, investors who have been patient in the market have been rewarded. Since 1900, investors have received an average return of almost 10 percent each year, our advice is to stay invested, avoid sharp movements in your portfolio and ignore volatility. ”
HODL strategy tempting during the bull market
Roberts, however, says there are some issues with this advice, noting that it is not as simple as buying something and then forgetting it and leaving it. While this may be tempting in a bull market, it has more to do with speculation than sound investment strategy. This has become clear in recent years, as the market expert explains in an article for Advisor Perspectives. Thus, during the Corona pandemic, “sports players” would have focused on the stock market, cheering on using trading apps like Robinhood. Stock selection has become a breeze. But as with any kind of speculation, this trend has now come to an abrupt end.
The difference between average and actual returns
But what is the problem with the HODL strategy? As Robert argues, there is a big difference between the average return on an investment when looking back at its price and the actual return. This is explained by the market expert based on the advice he received from the Wall Street company. So it is correct that the market-wide US index S&P 500 has given about ten percent annually since 1900. Adjusted for inflation, however, this rate would have already fallen to 8.08 percent. Nevertheless, investors must also take into account that there are years in which one has not achieved ten percent, but instead given up five percent. Just a year after such a downturn, however, a 30 percent increase in the index would be necessary to achieve the annual return of 10 percent at all. However, the market participant must be able to sit out in such a weak phase and remain invested in the market. Therefore, investors should be very careful with return promises based on a long period of time in the past and not rely solely on the “buy and hold” strategy.
Precisely this kind of speculation has become the norm in recent years. And not just for cryptocurrencies. The recent years’ flow of IPOs and SPACs and the hysteria surrounding memes have also contributed to the excesses in the stock market, as have the technology-heavy ARK ETFs from star investor Cathie Wood’s house.
No time to waste
Now that the bull market has given way to a bear market, many investors are facing the consequences of their excesses, Roberts writes: “While ‘HODLing’ works under the growing bull market, individuals have now realized that teams under a ‘bear market’ can be devastating. ” Because while it is possible to recover losses during a downturn in the long run and achieve a positive return, what is lost in between is time. And according to Roberts, time is “the most valuable commodity that investors own.”
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