Buy and Hold Investment Advice for Volatile Markets
Get ready, I’m going to reveal the biggest investing secret. And it’s not a bunch of hooey, but based on research by Dalbar, a top investment research firm, findings from Standard and Poor’s research and other investment performance studies. If you think you know how to invest or if you’re a newbie investor, just starting out, you must heed this investment advice.
It’s not complicated and anyone with a modicum of sense can beat most of their investing peer. And here’s why:
“Investors are more often than not their own worst enemy when it comes to investing. Often succumbing to short term strategies such as market timing or performance chasing, many investors cannot exercise the necessary discipline to capture the benefits markets can provide over longer time horizons.” ~Tom Allen and Mark Hebner, IFA.com
Searching for the Investing Holy Grail – A Fool’s Errand
Face it, you’re unlikely to become the next Warren Buffett or George Soros. Those famous investors are outliers with tremendous skill and probably a touch of good luck. To beat the market indexes over the long term is very difficult.
Don’t take my word for it.
A 2016 research report by Standard and Poor’s found that beating the market is very difficult. S&P compared stock index performance against similar actively managed fund’s investment returns. Buy and hold index fund performance handily beat the active fund managers most of the time.
Over 15 years, ending December 2016, 92.15% of large-cap, 95.4% of mid-cap and 93.21% of small-cap active fund managers underperformed their respective benchmarks. This means that if you bought an index fund and held it for 15 years, your returns would have been better than over 90% of actively managed funds.
Here are the buy and hold investment results for the S&P 500 index, which is commonly used to represent the entire U.S. stock market.
Buy and Hold – S&P 500 Annual Returns
90, 50 and 10 Years
Now what if you, bought and sold individual stocks, do you think you could have outperformed the index fund returns? Not, likely.
Buy and Hold Investing is Better Than Market Timing
Charles P. Jones explains the folly of market timing in Investment; Analysis & Management:
Invest $1.00 in the S & P Index in 1926. In 2003, your dollar is worth $2,285. That’s about 10 percent per year return!
Now try some market timing:
Invest $1.00 in the S & P Index in 1926. Trade out of the market during the 37 months with the best returns – during 1926-2003. In 2003, your dollar is worth $17.42
If you miss the best 37 months during that 77-year period then your return drops to 3.78 percent per year.
Even if you sell before a market decline, how will you know when to buy back in. With market timing you need to be right twice, when to sell and then when to buy.
If you want to succeed with investing, don’t do this:
• Buy high and sell low
• Day trade
• Participate in market timing strategies
• Employ complex options trading strategies
• Buy gold
• Trade forex
Ultimately, most investors return’s trail those of unmanaged index funds, like the S&P 500.
For lazy DIY investing, read; Investing Lazy Portfolios Drill Down
Buy and Hold Investing Works
“Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market.” ~Dalbar in “Quantitative Analysis in Investor Behavior”
From 1987 through 2016, the average equity investor earned 3.98% returns per year, according to the Dalbar study. During that same time, the S&P 500 index earned 10.16% annualized returns. The IFA (Index Fund Advisors) global stock index fund portfolio returned 10.79% during the same 15 years, beating both individual investors and the U.S. focused S&P 500 index.
With abundant research studies supporting the advantages of index fund investing and a buy and hold strategy, why are there so many folks devoted to momentum investing and other active strategies?
There is a strong push to try and beat the market returns. And some people do so – for a limited time. But, over decades, there’s limited research that supports active investment management strategies.
Why Buy and Hold Investing is Hard
Buy and hold is easy as markets rise, like during 2009 through 2017. Now, as markets become more volatile, it’s more difficult to stay the course. Several friends complained about the recent stock market drops and asked me what to do. Actually, one asked me the same question back in 2008 when the S&P 500 fell 36.55%. And, I gave her the same response then that I gave today.
Buy and hold is counter-intuitive during market declines. It’s scary to watch your investment returns fall. And that’s why diversification and a long-term horizon are important for investors.
If you have a solid 6 to 12 months cash cushion and a diversified investment portfolio, in accord with your age and risk comfort level, you have two choices about how to handle the market volatility; do nothing, or buy more on the market dips.
If you don’t have a cash cushion and a portfolio in line with your risk tolerance, let the market volatility be a reminder to put cash aside. Also, rejigger your investments so that you have a balance between riskier stock assets and tamer bonds that fits with your comfort level.
If you prefer investment help and the DIY investment approach isn’t for you, there are alternatives. For buy and hold, low fee index fund investing, consider the Betterment robo-advisor financial manager. This robo-advisor doesn’t cost much and will manage your investments to get you the best returns with the least amount of risk, and help you buy and hold.
The Best Investment Strategy Takeaway
The best way to succeed with investing is to understand market history and know that stock and bond investments are volatile. Yet despite the volatility, we invest because stock and bond investment returns are higher than safer cash interest payments.
Heed these simple investment rules, be patient and your buy and hold investment strategy will reward you.
- Have a cash cushion.
- Know your risk tolerance and understand when you’ll need your investment dollars.
- Keep money you’ll need in the next three to five years out of investment markets and in cash and certificates of deposit.
Ultimately, you’ll appreciate the wealth effect of long term buy and hold index fund investing.
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