This simple yet profound question has made its way into quite a lot of mainstream press outlets in the past year. While some people have posed the question for debate and discussion, others have uttered it more as a definitive statement following the carnage wrecked on stock investors in 2008.
I am here to say that reports of the death of buy & hold investing are greatly exaggerated. To support my argument I'm forced to pull out some numbers and statistics, but my goal is to be as succinct as possible while presenting the necessary facts.
As a common frame of reference I will be using the Standard & Poor's 500 index as my barometer of the broad stock market, as the S&P 500 is a much better overall indicator than the smaller Dow Jones Industrial Average (DJIA).
2008 Was an Emotional Year
Let's start with the impetus for the question in the first place. The S&P 500 fell over 37% in 2008, the worst single-year performance since 1932. Last year wrought a lot of pain to a lot of people, so it's only natural for folks to wonder if they should give up the age old strategy to stay in the market, year in year out, as the best way to build long-term wealth.
Without getting too much into behavioral finance, let me point out that while the stock market is a mechanism, investors are human. We experience both greed and fear, and as sure as the sun will rise tomorrow, these two emotions will continue to exist in the minds of investors.
To be sure, 2008 was a year of supreme fear. But the statistics can bring some reason back to the mix. (Playing follow-the-leader in investing can quickly become a dangerous game. Learn how to invest independently and still come out on top. Check out Logic: The Antidote To Emotional Investing.)
Don't Fear the Statistics
First is a very short-term example. If you decided on December 31 of last year, "That's it, I'm out of the stock market!" after many years of being invested, then you would have ended your holding period for stocks on one of the worst years ever.
You may have even patted yourself on the back as the S&P fell further to begin 2009, but you would have then missed out on one of the sharpest rallies in stock market history. After surging 45% from the lows in early March, the S&P 500 is now up over 11% this year.
Now let's open up a larger window and look at some longer-term data. Below are some annualized returns for the S&P 500 over various holding periods. I use these because they highlight just how different the data can look when viewed over short vs. longer time periods.
Jan. 1, 2000 – Dec. 31, 2008: Annualized Return (-3.7%)
It is this time period specifically that proponents of the "buy & hold is dead" theory most often use in their arguments. But two important things to note about this time period are that a) it's short, and b) it includes two major recessions, the one we're in currently and the infamous dot-com collapse of 2000-2002. To average less than a 4% loss per year seems almost mild considering all the destruction within that time period.
But who has only an eight-year time horizon? That's just a fraction of the time that the average worker invests for retirement, and less than half of what a new parent would have to work with in preparing to send their kids to college. So what happens if I broaden the window just a bit, to say 15 years?
Jan. 1, 1993 – Dec. 31, 2008: Annualized Return 6.67%
Look how dramatically the annualized returns change here - a full 10% per year better, just by expanding the window to include a time horizon closer to normal for life goals such as retirement and college. (Find out whether you'll be ready to leave the working world. Read Can You Retire In Five Years? to find out.)
And just to show that I'm not cherry-picking the results in any way, I'll include one more time horizon in which I specifically choose a starting date right before the last messy, multi-year recession of our recent past: 1973-74, two years in which the stock market was down 15% and 26.5%, respectively.
Jan. 1, 1972 – Dec. 31, 2008: Annualized Return 9.51%
That is a 26-year period that captures 5 major recessions since the Great Depression, and through it all, stock investors averaged over 9% per year. (How does our current economy compare to past recessions? Read A Review Of Past Recessions to find out.)
The Bottom Line
The main reason why buy & hold is such a sound investment policy is this: year to year, results can be very volatile, as 2008 made quite clear. Bad years catch us all by surprise, whether we spend our lives studying the markets or just look at our 401(k) statements four times per year.
In closing, if you're not investing for the long-term, you're just timing the market, which most professional money managers worth their salt will tell you is downright difficult, if not impossible. (To learn more the most reliable ways to invest, check out Buy-And-Hold Investing Vs. Market Timing.)
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