MONTHLY MARKET MUSINGS

April 2025

Buy-And-Hold Is Not A Short-Term Strategy

Uncertain times bring volatility to the markets. Emotions tend to drive decision making and much of the long-standing sage investing advice becomes increasingly difficult to adhere to. It is at this time that investors need to be reminded that there is good reason why buy-and-hold and sticking to one's investment strategy have been pillars of every worthwhile market guru for the past 100 years. This is what tends to get rewarded over time, investing discipline and being committed to a plan despite outside influences trying to steer you off course. While the market is currently within a period of ambiguity, much of the rhetoric would suggest that there is a complete collapse and that we have ventured into bear market territory. While not ideal, the S&P 500 Index is down approximately 4.7% year-to-date as of the end of March[1]. To put that in perspective, that takes us back to levels last seen in mid-September of 2024. So, while many would have assumed we have seen a huge setback in this correction, in reality, we are about the same place we were six months ago. If we take a deeper historical look at it, dating back to 1929, corrections on the S&P have averaged approximately 13.8% peak to trough[2]. Currently, the S&P 500 Index is down approximately 9.0% from its all-time high and reached as low as about 10.7%. This would suggest that if this is no different in a long-term context to a correction within a bull market, then we would be relatively close to the bottom at this point.
 

We have mentioned numerous times in the past that a shift to cash during a correction within a bull market has historically done more harm to returns than good. The key reason behind this is that people may get some of the exit timing correct, i.e. the market drops a bit more after someone moves to cash, but it is the timing of getting back in where many falter. In the current context, if someone moved to cash due to the tariffs what becomes the deciding factor to jump back in. Is it when the tariffs are fully known and there is no more uncertainty? Is it when the tariffs are reversed? Or is it when there is a new administration in the White House? It would be nearly impossible to know what the exact timing is and missing out on those days, weeks or in some cases months after the market bottoms out can erase any positives that came from moving to cash. So, if someone were to miss that initial 5-10% move off the lows, would that person be comfortable with jumping back into the market at that point? These are difficult decisions to make and there is always a fear of missing out that begins to cloud our judgement. The other major thing to consider is the tax consequences that happen when a decision is made to shift to cash rather than focus on the buy-and-hold strategy. There is a trade-off that occurs when a position has a capital gain and there is a desire to shift to cash, we choose between accepting a guaranteed realized decrease in capital available to invest (due to the money that is paid out to the government in the form of capital gains taxes) and the possibility of a potential future unrealized loss (the further unrealized drop in value of our holdings). The larger the capital gain, the higher the taxes owed which means that the break-even level in favour of shifting to cash becomes further away.  
 

As an example: Let’s say you purchase a stock years ago at $100 and it currently has a market value of $400 which means there is a capital gain of $300. The capital gains tax you would owe if you sold and shifted to cash would amount to $80.30 (assuming a 50% inclusion and the top tax bracket of 53.53%). When factoring in the taxes owed, this would mean that would have about $319.70 in cash that will eventually be later deployed back into the market as opposed to having $400 currently in the market. The equivalent loss required for your $400 in market value to drop to $319.70 would be a 20.1% drop. This suggests that unless your expectation is for that stock to drop more than 20.1%, it would likely be better to simply hold on to the equity and not face the immediate tax consequences. Now, granted this is a simple example and if the holding had a smaller gain then that break-even threshold would be lower, but it serves a purpose in that it demonstrates that a shift to cash is not without its own set of consequences.
 

In the end, short-term fluctuations in the market don't often present a good reason to shift into cash if the goal is long-term stable consistent growth. Investors often need to be reminded that they are not traders and that they are playing the long game. There are some reasonable arguments to have some cash available for bargain hunting purposes if and when the market corrects but that does not mean abandoning the buy-and-hold principles. 

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com