It did not take just one bad year [2008] to kill the buy and hold investment strategy. The question is was it ever a viable option for managing money? In the last ten years we have seen two 40% + drops in the stock market. For a buy and hold investor, large market drops are hard to overcome both mathematically and emotionally by them self let alone twice in ten years. The financial services industry and financial media would have you believe that there are no other options but to buy and hold. There a reason for wanting to perpetuate buy and hold as an investment strategy but it does not favor you.
Investing Reality
Buy and hold has been perpetuated as an investment strategy for so long because it is a money maker for everyone but you the investor. How do I know that? Who has made money in the last ten years? The financial services industry, your advisor, your broker, and mutual funds have all been paid. These are all the same sources claiming buy and hold as an investment strategy. What has buy and hold produced? Consider that the S&P 500 stood at 1,228.10 on 1/4/1999 and on 12/31/2008 at 903.25. That folks is a -26.45% drop over the ten year period. If most funds do not beat their benchmark, as S&P studies have shown, than you may have done worse.
Defining Dirty Words
There are alternatives to buy and hold that your advisor will probably not bring up. One of those alternatives being market timing. Market timing is a dirty little phrase in the financial services world. Market timing is considered taboo mainly because buy and hold needs an opposite too look attractive against. What most advisors do not tell you is they practice market timing on some level. Market timing is attempting to predict where the market will be going based on some data or research. So, when your advisor says I think or feel something or other he/she is timing the market. They will not admit they are timing. They will call it tactical or strategic something or other but now you know it is a form of timing.
Trend Following
Trend following, which I practice, is defined as an investment strategy that takes advantage of long-term positive and negative moves that play out in the financial markets. A trend following strategy will have a particular metric or a series of metrics that trigger buying and / or selling. Trend following is not really market timing since you are not predicting anything rather buying and selling at predetermined points and it is certainly not buy and hold.
The Ongoing Lie
Let me clarify plainly, why the financial services industry keeps the buy and hold idea going. It is the easiest way to have you leave your money in one place. It is called “sticky” money. Additionally, buy and hold is easy. The advisor has to do very little work but they still bill as if they were doing something for you. To keep the invest public trained on buying and holding the financial services industry (mutual fund companies to big brokerage firms) produce a very misleading marketing piece. This piece is usually titled what if you miss the 10 best days in the market. The piece usually outlines what your supposed detriment would be if you missed the 10, 20, 30, 40 best days in the market over a particular time period. The point is to reinforce that you should stay invested all the time because you never know when those good days are going to come. What they do not show is what if you miss the 10, 20, 30, 40 worst days in the market. Or better yet what if you missed the best and worst days.
The Real Numbers
Here is a best and worst day study from the beginning of 1984 through the end of 2008. If you would have bought and held the S&P 500 in this period of time you would have realized an average annual return of 7.06%. Now lets look at if you would have missed some days.
| Days Missed | Missing Best | Missing Worst | Missing Best & Worst |
|---|---|---|---|
| 10 Days | 4.10% | 11.23% | 8.15% |
| 20 Days | 2.15% | 13.80% | 8.58% |
| 30 Days | 0.54% | 15.83% | 8.61% |
| 40 Days | -0.93% | 17.59% | 8.82% |
(Source: NAAIM, Inc., This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)
What does this chart tell you?
- The option the financial services industry shows (missing best days) in their marketing material is the least desirable
- The most consistent option is missing best and worst
- Missing the worst days is best because losses are more powerful than gains
What the financial services industry will have you believe is no one can pick all of the best days or conversely avoid all of the worst days. Right?? There are ways to miss a very large percent of the best and worst days. Stay tuned to my next post where I will outline how to get as close as you can to missing the best and worst days in the market.