‘HODL’ Finds Its Inevitable Flaw
2022.06.24 13:26
an original misspelling taken on as a badge of courage by cryptocurrency investors, spread to ‘ during the run up in 2020 and 2021.
The term ‘ originated from user GameKyubbi, who posted a drunk, semi-coherent, typo-laden rant about his poor trading skills.
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Within an hour of that post, ‘had become a meme. Initially, the memes referenced the movies and , but there are now countless memes floating around the internet.
Of course, there seemed to be no risk to a strategy at the time, as the Federal Reserve and Government pushed trillions of dollars in liquidity into the financial markets and economy. With the economy shut down due to the pandemic, sports gamblers turned their attention to the stock market to get their ‘fAs asset prices surged and with the assistance of the Robinhood (NASDAQ:HOOD) app, investing became so easy you could draw letters out of a Scrabble bag.
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Unfortunately, when it comes to buying and ‘ the outcome from periods of excess speculation is always the same.
The HODL Fallacy
I recently wrote about the problems with To wit:
S&P 500 Total Real and Nominal Return
While the average rate of return may have been 10% over the long term, the markets do not deliver 10% yearly. Let’s assume an investor wants to compound their returns by 10% a year over five years. We can do some basic math.
Math Of Loss 10pct-Compound
After three years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%. Furthermore, it then requires a 30% return to regain the average rate of return required.
While an investor can ‘for the long term, there is a significant difference between the AVERAGE and ACTUAL returns received. As I showed previously, the impact of losses destroys the annualized effect of money.
Promised vs Real Returns
The differential between what investors were promised and actual returns is substantial over the long term. Furthermore, you DIED long before realizing the long-term average return rate.
Amid a the impact of losses during the second half of the market cycle becomes obscured. The stronger the bull market advance, the more mistakes investors make by assuming the current cycle will not end as they take on more speculative risk.
Unfortunately, all cycles end.
HODL – Another Word For Speculation
One of the more disappointing developments in the financial markets over the last 12 years has been the rise of by investors. But such is not surprising given the repeated interventions by the Federal Reserve. As Larry McDonald of the Bear Traps Report noted:
Fed Balance Sheet Reduction Schedule
Such isn’t it’s But who could blame young, inexperienced individuals with a “ check and promises of quick riches in Bitcoin as it surged daily?
Bitcoin-1000 Value Invested
But it wasn’t just cryptocurrencies. Wall Street supplied traders with SPACs like Lucid Motors when IPOs could not get pushed out fast enough.
1000 Value in LCID-HODL
And ‘stocks like AMC Movie Theatres got touted on websites like WallStreetBets.
1000 Value In AMC-HODL
Of course, the ‘ craze got represented best by Cathie Wood and the Arkk ETFs.
1000 Value In ARKK-HODL
While ‘ worked during the rising bull market, individuals have now discovered holding during a can be devastating.
Ultimately, investing is about managing the risks that will substantially reduce your ability to to
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The current bear market is no exception and is the logical outcome of what follows the last advance.
Time To Let Go Of HODL
There is a huge market for investment schemes and programs as individuals keep hoping to find the secret trick to amassing riches from the market. There isn’t one.
In the 1990s, investors plowed money into speculative investments. Ultimately, they lost most of it at the turn of the century. Then, they turned their focus to real estate, only to get wiped out in 2008. The runup and crash in the cryptocurrencies, disrupter technologies, SPACs, and stocks have all met a similar end.
Many believe that investing in the financial markets is their only option for retiring. Unfortunately, they fell into the same trap as most pension funds hoping market performance will make up for a shortfall. The chart below shows a 6% annual return rate and what stocks historically should return. Starting when returns are high has invariably poor outcomes.
S&P 500 Return Projections
The damage market declines inflict on investors hoping to garner annualized 8% returns to make up for the lack of savings is all too real and virtually impossible to recover from. When investors lose money in the market it is possible to regain the lost principal given enough time, however, what can never be recovered is the lost “time” between today and retirement. “Time” is finite and the most precious commodity that investors have.
Navigating The Next Cycle
We have previously detailed the basic guidelines for navigating market cycles.
Before sticking your head in the sand and ignoring market risk based on an article touting “long-term investing always wins, just ‘HODL’” ask yourself who benefits?
Emotions and investment decisions are very poor bedfellows. Unfortunately, most investors make emotional decisions because FEW follow a well-thought-out investment plan. Retail investors generally buy an off-the-shelf portfolio allocation model heavily weighted in equities. The illusion is that stocks will somehow make money over a long enough period.
Unfortunately, history has been a brutal teacher about the value of risk management.
