Buy and Hold vs. Active Management: What Retirees Need to Know
Introduction
A retiree has two choices when deciding how to manage their investments: “buy and hold” or actively managed.
Each carries distinct risks, but for retirees, the stakes are higher.
Portfolio declines hurt retirees more for three reasons:
Retirees are most likely drawing on some of their nest egg for living expenses, thus locking in some losses by forced selling at lower prices.
Unlike working years, there are no systematic contributions to take advantage of lower prices in the market.
Retirees' biggest fear is running out of money—market declines only amplify that fear.
Which strategy is right for you? Let’s break it down.
Buy and Hold Investing for Retirees
The classic.
Pick a mix of lowly correlated stock and bond funds and make a promise to yourself to never sell in a panic.
There are decades of evidence that show market declines are eventually reversed.
This is true.
There are a few issues to be aware of with this method:
Losses in real time feel much different than looking at a chart of historical stock prices to see that everything usually comes back.
I like to point to the performance of a 60/40 portfolio during the Global Financial Crisis in 2008, which saw a peak-to-trough decline of over 35%.
For retirees who had just retired, that was an incredibly scary moment.
An old wartime saying goes, “There are no atheists in a foxhole.”
Similarly, I like to say, “There are no buy-and-hold investors in a bear market.”
Periods of market stress can cause most of your investments to move in the same direction (down).
Bonds are typically used as the ballast of a portfolio, but even they aren’t immune to declines in prices.
In 2022, stocks and bonds were both down double digits.
There isn’t a universally accepted “best” starting investment mix.
How much should you hold in stocks?
What should the split of US vs International stocks be?
What kind of bonds should you include?
Should you optimize for income or growth?
In an ideal world, a retirement begins in the middle of an indefinite bull market, and retirees are happy to abide by the 4% Rule for the rest of their lives.
In reality, market volatility and the accompanying news cycle will cause many to change their strategy at potentially the worst time.
Active Investment Management for Retirees
“Don’t time the market.”
Those four words have become canon for many investors.
Timing the market evokes the image of deciding daily whether to be all cash or fully invested.
Taken to that extreme, I would tend to agree.
However, having a predefined plan to proactively manage risk can help limit drawdowns and preserve mental health.
In fairness, there are a few issues to be aware of with this method:
It is much easier to sell than it is to buy back in.
Selling feels good because you are taking risk off the table.
Buying back means putting money back to work at a higher price than where you sold, or to buy lower when things look even bleaker.
Certain decisions can look foolish in hindsight.
Hindsight will always be 20/20.
It is much more of a time commitment to monitor and adjust the portfolio as needed.
Active management, if practiced, should be determined from the outset.
The problem is that many people start as buy-and-holders and then become active managers after a scary news cycle or a hot stock tip from a friend.
Conclusion
Deciding on an investment approach is one of the most important choices a retiree will make.
My best advice is to pick a strategy (or an investment manager) that jives with your personality and stick to it.
Be aware of the risks I outlined above.
Be prepared to question your choice at some point in the future.
The best investment strategy is one that is adhered to and helps you meet your goals.
FAQs
Q: Is buy-and-hold investing still a good strategy for retirees?
A: Buy-and-hold can work well for retirees with a large enough nest egg, a stable income stream from Social Security or a pension, and the emotional discipline to stay the course through market downturns. The strategy's biggest risk in retirement isn't the math — it's the behavior. Retirees who panic-sell during a bear market lock in losses at the worst possible time. If you have doubts about your ability to hold through a 30%+ decline, that's important information about which strategy fits your personality.
Q: What's the difference between active management and just timing the market?
A: Timing the market typically refers to making all-or-nothing, reactive calls based on short-term predictions — going all cash one day, fully invested the next. Active management, done properly, is something different: a rules-based, predefined framework for adjusting portfolio risk as conditions change. The key word is predefined. The biggest mistakes happen when investors start as buy-and-holders and switch to active management mid-panic, with no plan in place.
Q: How do I know which investment approach is right for my retirement?
A: The honest answer is that the best strategy is the one you'll actually stick to. That depends on your income needs, your timeline, your other assets, and — just as importantly — your temperament. A fee-only fiduciary advisor can help you stress-test both approaches against your specific situation, rather than choosing based on what worked for someone else. If you're based in the Saratoga Springs area, Continuum Wealth Advisors offers complimentary consultations to help retirees think through exactly these kinds of decisions.
