Anchoring vs. Buy-and-Hold

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confused_newbie
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Anchoring vs. Buy-and-Hold

Post by confused_newbie »

Hi, I'm reading the 2nd edition of "The Bogleheads' Guide to Investing". In chapter 19 (Mastering Your Investments Means Mastering Your Emotions), the authors talk about the dangers of Anchoring. The following are some excerpts:

... Do you hold on to an investment that has lost value, vowing only to sell it when it rises to a certain price?...
... No doubt, there are still investors from the tech bubble, dearly holding on and patiently waiting for the return of NASDAQ 5000. Those kinds of anchors weigh down returns.

I am really confused. I understand that for individual stocks, anchoring may be dangerous. But for index funds, aren't you supposed to buy and hold, pretty much forever? Say if you bought a NASDAQ index fund during the tech bubble, are you supposed to hold it to sell it?

Thanks for everyone's help and input.
Johm221122
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Re: Anchoring vs. Buy-and-Hold

Post by Johm221122 »

If QQQ is in your investment plan, yes keep it.But I think most would feel it's not a index we'd hold
http://www.bogleheads.org/forum/viewtop ... 0&t=102683

http://www.bogleheads.org/forum/viewtop ... 1&t=109649
Try 3 fund portfolio
http://www.bogleheads.org/wiki/Three-fund_portfolio

Written investment plan
http://www.bogleheads.org/wiki/Investme ... _statement

Welcome to forum
John
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siamond
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Re: Anchoring vs. Buy-and-Hold

Post by siamond »

Yes, you're right, anchoring is about individual stocks or narrow sectors. Not for very broad indexes, for which buy & hold is indeed the way to go.

Ok, the NASDAQ is kind of in-between, but I suspect most people on this board would still find it 'narrow'. I certainly wouldn't invest in a NASDAQ index, and would not want to anchor myself to it...
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Regal 56
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Re: Anchoring vs. Buy-and-Hold

Post by Regal 56 »

Anchoring is applicable to those who buy and sell, hoping to make a profit on the timely execution of their decisions. Buy and hold investors aren’t doing this. They instead are buying broadly diversified assets and holding them in the belief that, over time, they’ll make a profit. Buy and hold investors sell only when rebalancing or drawing down during retirement.

This, of course, is a generalization. A particular investor might play both sides of the fence. As others have noted, anchoring should apply only to individual stocks or narrow sectors. (Some investors, however, frequently sell out of a broadly diversified mutual fund because they’re unhappy with its performance.) But generally speaking, anchoring has no relevance to a buy and hold investor. This is particularly true for index investors.
staythecourse
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Re: Anchoring vs. Buy-and-Hold

Post by staythecourse »

I would think anchoring (or at least its negative connotation) is in reference to folks buying a security and looking to sell the security again for a quick profit, i.e. market timing. For those folks they will continue to want to hold the security hoping the price will eventually come back up.

If you choose NASDAQ as a core index fund for a buy and hold it is fine to hold despite taking forever to come back up. The question then is did you choose the right index fund as part of your asset allocation. For example, I invest in gold and there will be times it is down for YEARS and I accept that, but it has a role for me in the construct of my portfolio. I am not holding the gold because I am consumed regarding the price I bought it, i.e. "anchoring", but instead see value in my portfolio as a whole.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
avalpert
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Re: Anchoring vs. Buy-and-Hold

Post by avalpert »

Anchoring can apply to any investment - including broad index funds. Anything that you bought at a price or has a price assigned to it can be the target of unhelpful anchoring.

And it could apply to buy and hold investors as well in certain contexts - say for example they hit their rebalancing bands when both stocks and bonds are declining but won't pull the trigger because they don't want to sell the stocks (or bonds) at a loss.

The key point is to not get caught up on anchors at all - whether it is the price you bought at, a price target you set for yourself, a round number, the last all time high or low etc.
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confused_newbie
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Re: Anchoring vs. Buy-and-Hold

Post by confused_newbie »

Thank you very much for everyone's input! Is Russell 2000 Index considered a broad index fund?
placeholder
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Re: Anchoring vs. Buy-and-Hold

Post by placeholder »

Not really the R2000 is a small cap blend and the equivalent broad fund is the R3000.
technovelist
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Re: Anchoring vs. Buy-and-Hold

Post by technovelist »

avalpert wrote:Anchoring can apply to any investment - including broad index funds. Anything that you bought at a price or has a price assigned to it can be the target of unhelpful anchoring.

And it could apply to buy and hold investors as well in certain contexts - say for example they hit their rebalancing bands when both stocks and bonds are declining but won't pull the trigger because they don't want to sell the stocks (or bonds) at a loss.

The key point is to not get caught up on anchors at all - whether it is the price you bought at, a price target you set for yourself, a round number, the last all time high or low etc.
Exactly. This is VERY hard for most people to do, though.
In theory, theory and practice are identical. In practice, they often differ.
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confused_newbie
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Re: Anchoring vs. Buy-and-Hold

Post by confused_newbie »

In my 401K account, I have 100K in Russell 2000 Index Fund and nothing in SP500 Index Fund. I'm thinking that I should transfer 50K from R2000 to SP500. Should I do it in one transaction, or transfer $2,000/month over the next three years, or use some other threshold? Thanks.
avalpert
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Re: Anchoring vs. Buy-and-Hold

Post by avalpert »

confused_newbie wrote:In my 401K account, I have 100K in Russell 2000 Index Fund and nothing in SP500 Index Fund. I'm thinking that I should transfer 50K from R2000 to SP500. Should I do it in one transaction, or transfer $2,000/month over the next three years, or use some other threshold? Thanks.
Why are you making the transfer - what allocation are you looking to get to across your whole portfolio and how does this help you get there.
JW-Retired
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Re: Anchoring vs. Buy-and-Hold

Post by JW-Retired »

Last edited by JW-Retired on Wed Oct 22, 2014 5:12 pm, edited 1 time in total.
Retired at Last
xenial
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Re: Anchoring vs. Buy-and-Hold

Post by xenial »

JW Nearly Retired wrote:You already own all the SP500 index stocks in the Russell 2000. SP500 is a cap wt. blend of the 500 largest US stocks. Russell 2000 is such for the 2000 largest. . . .
No! The Russell 2000 excludes the largest 1000 stocks and includes the next 2000. It's a small cap index.
avalpert
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Re: Anchoring vs. Buy-and-Hold

Post by avalpert »

JW Nearly Retired wrote:
confused_newbie wrote: In my 401K account, I have 100K in Russell 2000 Index Fund and nothing in SP500 Index Fund. I'm thinking that I should transfer 50K from R2000 to SP500. Should I do it in one transaction, or transfer $2,000/month over the next three years, or use some other threshold? Thanks.
You already own all the SP500 index stocks in the Russell 2000.
No, Russell 2000 is a small cap index.
SP500 is a cap wt. blend of the 500 largest US stocks.
No, the S&P 500 are a capitalization weighted index of 500 large cap stocks selected by Standard & Poor's to represent the total US market - they are not necessarily the largest (they aren't).
JW-Retired
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Re: Anchoring vs. Buy-and-Hold

Post by JW-Retired »

avalpert wrote:
JW Nearly Retired wrote:
confused_newbie wrote: In my 401K account, I have 100K in Russell 2000 Index Fund and nothing in SP500 Index Fund. I'm thinking that I should transfer 50K from R2000 to SP500. Should I do it in one transaction, or transfer $2,000/month over the next three years, or use some other threshold? Thanks.
You already own all the SP500 index stocks in the Russell 2000.
No, Russell 2000 is a small cap index.
SP500 is a cap wt. blend of the 500 largest US stocks.
No, the S&P 500 are a capitalization weighted index of 500 large cap stocks selected by Standard & Poor's to represent the total US market - they are not necessarily the largest (they aren't).
Oops, I read carelessly. thanks for the quick corrections.
JW
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Johm221122
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Re: Anchoring vs. Buy-and-Hold

Post by Johm221122 »

confused_newbie wrote:In my 401K account, I have 100K in Russell 2000 Index Fund and nothing in SP500 Index Fund. I'm thinking that I should transfer 50K from R2000 to SP500. Should I do it in one transaction, or transfer $2,000/month over the next three years, or use some other threshold? Thanks.
You need a plan,
http://www.bogleheads.org/wiki/Investme ... _statement

John
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