Buy & hold investing and Fast Follow Investing work well together. I compare the two strategies and highlight their differences. Combine them to create the perfect smart investing solution for early financial freedom.

This post is part of a 4-part series about smart investing for the semi-retired.

—-

In my 20s, I consulted for Accenture out of its Milwaukee office. One highlight of working at a big firm in the late 90s was the sometimes extravagant employee perks.

The greatest perk happened one day in October every year. To reward us for jobs well done, Accenture leadership would rent out Six Flags Great America… in its entirety. I would always bring my girlfriend (now wife).

Imagine showing up at Six Flags just north of Chicago, parking in the front row, and walking into an empty park. It wasn’t as empty as Wally World was for the Griswolds. But close…

She and I would ride Iron Wolf and American Eagle and our favorite, Raging Bull. At times, we needn’t get off to get back on! One year, I think I went on 50 rides.

My wife and I bonded over our shared love for roller coasters and these incredible days at Great America.

In 2018, twenty years later, she and I were living in the San Francisco Bay Area. That year, we hired a sitter and drove 30 minutes to Six Flags Discovery Kingdom in Vallejo. We got there early. With excitement, we boarded our first ride.

When we got off, we looked at each other and said, almost in unison, “I don’t think I can do another one.” We pushed through it, tried one more, and both nearly lost our breakfast. Dizzying.

The roller coasting chapter of our lives had closed.

We looked like the girl in front. Photo by Chris Slupski on Unsplash

My Investing Roller Coaster

I felt the same way when watching my investment portfolio crash in March 2020. What hadn’t bothered me in 2001 and 2008 now did. I could no longer stomach the steep losses. Why?

I looked at my (now greater) savings as the collection of 20+ years of hard work. Watching $300,000 vanish was hard to take. I remember thinking, “I’ve just lost three years of savings and growth…3 years of sacrifice.”

At least I didn’t pass out like I almost did at Six Flags.

My stomach churned because, unbeknownst to me, I had entered the retirement risk zone. The risk zone is the five years before and five years after your retirement date.

If you are heads-down saving and investing, you likely haven’t thought about this 10-year span. And if you want to retire early like most of us, you may already be in the zone. The retirement risk zone will make or break your retirement.

In the five years before retirement: Should the market fall, you risk not reaching your savings goal.
In the five years after retirement: Should the market fall, you risk withdrawing savings as your investments decline.

In both cases, you need to delay. The market has dictated your retirement plans.

Two Ways to Stop the Queasiness

In my last two posts, I introduced two approaches to stabilizing returns for high-earning investments.

Buy & hold stock indexing with a cash savings buffer. In this strategy, your buy & hold portfolio offers growth while emergency cash savings protect you from selling stock during down markets.
Fast Follow Investing. In this strategy, you stay fully invested in high-earning investments as they trend up. You move to cash savings when investments trend down and before losses become too steep.

Two different ways to achieve high, stable returns. Which is better? Let’s compare. Spoiler alert: they are both good, and they complement each other nicely.

Comparing the Two Strategies

Take a look at these comparisons I’ve drawn based on the two previous posts in this series:

There is a lot here, I know. Fast Follow Investing is especially new and different. And it doesn’t always align with popular beliefs.

So, let’s try it another way.

Expanding the Analogy

Derek Thompson, one of my favorite podcasters, speaks in analogies.

It can help new ideas stick. So let me try one.

I think of buy & hold investing like that ride on a roller coaster.

A roller coaster entertains riders with steep climbs and steeper drops.

You must put your trust in the ride because you have no control.

For long stretches, there is a lot of up and down, but you may not make any vertical progress.

But riding is easy. You get on the ride and go (think: set it and forget it).

Fast Follow Investing (FFI) is more like a mountain trek.

You choose your path, and so control your destiny.

While you may need to backtrack, it’s minimal if you plan your route well.

When you reach the summit, you’re exhausted but feel great given the achievement.

Use Both for Strong Diversification

Buy & hold and Fast Follow Investing are valid investing strategies.

You can expect positive returns from both. But, one may work better than the other in certain situations.

For example, the new saver has time to reap rewards from buy & hold. This is how I invested for the first 25 years of my investing life. And it served me well. But then I entered the retirement risk zone.

The soon-to-be retiree does not have the time to recover from steep losses and should tilt their portfolio more toward Fast Follow Investing. It’s exactly what I have done. Now financially free, I use both strategies. Why?

Buy & hold and Fast Follow Investing are excellent diversifying strategies.

Together, they reduce your portfolio’s overall volatility and don’t dilute investment returns. Diversification, not diworsification.

And how fortunate this is! Take a small piece of your buy & hold portfolio and try it out. Dipping your toe in the Fast Follow Investing waters is a good way to learn something new and manage risk at the same time.

—

Brian Herriot diversifies his life across his home in Alameda, California, and cabin in Hazelhurst, Wisconsin. He also prepares financial freedom plans for consultants and other mid-career professionals in one-week sprints. Check out his take on a new and different kind of retirement at choosyconsultant.com.