Published: Mar 14, 2016 9:46 a.m. ET
Finding solid investments and sticking with them ultimately pays off
ChuckJaffe
The «buy-and-hold-is-dead crowd» is out in force again.
Buoyed by the worst start to a year in stock market history, supported by happy gold bugs, and with the backdrop of a volatile market that changes trends and directions more than a confused teenager, the message being spread now is that investors need to be more like traders to make money, and that stand-pat investors will be crushed by the next downturn.
It’s the same poppycock that comes up every time the tide isn’t visibly rising, inspiring experts to hide behind the idea that «it’s a stock-picker’s market.»
A ‘buy-and-hold’ investment strategy works over many years — decades even.
It’s also not true, and it’s not likely ever to be true.
It’s not that time in the stock market always beats timing the market; it’s that finding solid investments and sticking with them pays off, and that while jumping around ultimately runs investors into a buzzsaw of heightened expenses or bad picks.
Moreover, in the day of the 24-hour news cycle and with social media giving everyone the ability to crow about their latest great trade or savvy move, it’s important to remember that days feel long but years are short.
Tim Buckley, chief investment officer at the Vanguard Group, recently noted on my radio show, «MoneyLife with Chuck Jaffe,» that investors generate an additional 1.5% in annualized returns «just by sticking with their plan.»
‘Time in the market and compounding make up for bad luck.’ Jeffrey DeMaso, director of research at Adviser Investments
Consider that Mark Hulbert — who recently closed the Hulbert Financial Digest after 36 years of analyzing the performance of newsletters — said that decades of research showed that the best stock jockeys only delivered about 1% more per year than just passively holding the index, and that most of that extra return was attributable to luck.
Combine those two viewpoints and you recognize that the average investor does more to deliver outstanding performance by doing less than they could gain by managing their money more actively.
Obviously, it depends on the quality of the plan and what an investor is hanging on to, but buy-and-hold also is alive and well because it’s more than simply hanging on to investments for a long time.
First, you’re holding an investment, and not forgetting about it.
Second, you are holding to a plan, and not just an investment; if that plan calls for you to rebalance a portfolio to stick with an asset allocation, make the trades necessary to stay on point. If the plan calls for the portfolio to become more conservative over time, adjust holdings appropriately.
Third, while «forever» is the favorite time period of Warren Buffett and other long-term investors, you are not required to strap yourself to bad investments in perpetuity. If a fund (or a stock) is changing how it’s run or consistently fails to meet expectations, you shouldn’t be sticking with it for life.
As part of allocation plans, you also control some measure of timing. Investors who are nervous about current market conditions can stick with what they’ve got while building cash rather than adding to the portfolio. If you only want to put the money to work when the time feels right, that’s not a bad thing; you just shouldn’t expect it to deliver excess returns.
Adviser Investments, the wealth-management firm led by the editors of both the Fidelity Investor and The Independent Adviser for Vanguard Investors newsletters, did a recent study, did a recent study that started with a $1,000 initial investment in 1985, with annual investments made for the next 30 years.
One investor simply put the money to work at year-end while the other had the worst timing and only put the money to work when the market had peaked each year.
At the end of 30 years, the year-end investor had generated a 9.2% return, compared with an 8.8% average annualized gain for the «unlucky investor.»
The bigger point, however, is that the person with the worst possible timing still made a good return over that time frame, despite the bear markets and other traps.
In short, noted Jeffrey DeMaso, director of research at Adviser Investments: «Time in the market and compounding make up for bad luck.»
What they can’t make up for is bad decision making, and the chances of encountering that go up with each trade that’s trying to find the perfect time to squeeze just a bit more out of the market’s next up move or that sidesteps the next decline.
The crowd shouting that buy-and-hold is dead will always have arguments on its side. Its proponents can point to the pain felt amid declines, and the damage done during bear markets. But the people most hurt by downturns have been those who bailed out at the wrong time, but even those who jumped ship at the perfect time suffered if they failed to get back into the market and wound up losing or diminishing the compounding effect of one entire market cycle.
Ultimately, there’s no one right answer; both strategies can co-exist, even within the same portfolio, and be profitable over time. Ultimately, whether buy-and-hold is dead depends on whether an investor can live with the ups and downs and stick with it, more than it depends on the market itself.