Now's the Time for Buy-and-Hold

Includes: IVV, SPY
by: IndexUniverse

By Matthew Hougan

I keep reading articles about how "buy-and-hold is dead." That's laughable. If there were ever a time for buy-and-hold, that time is now.

The latest salvo comes from Tom Lydon at ETF Trends. He writes:

The age-old strategy that investors have stood by, the buy-and-hold strategy, has been tested, and market players are now seeking exchange traded funds (ETFs), among other vehicles, to establish a different relationship with the market ...

The technical indicators are becoming the norm for market players and long-term investors who are no longer staying on the sidelines and watching, as the recent market volatility has left them burned.

This is a reversal of the long-term investors trend, and it's changing the investing landscape. What was once a solid, long-term investment is no longer, and the market uncertainty, mixed with economic troubles, has led the way to a new state of the "normal."

I heard a similar thing when I participated in the CFA Society of Philadelphia's annual forecasting dinner in January. Bob Pisani, the moderator, said that "buy-and-hold is dead," and a roomful of CFAs nodded in full agreement.

I like both Bob and Tom—they're smart guys who are working hard to help investors achieve better returns. And you can see where they're coming from. The S&P 500 is lower today than it was 10 years ago. It doesn't take much to realize that buying and holding the S&P 500 over the past 10 years wasn't such a great idea. But there are two major flaws with the "buy-and-hold is dead" idea.

The first is the idea that traders will do better than buy-and-hold investors. By definition, they will not. Investors as a whole own the market. For every trader who makes a good decision, there is a trader on the other side of the deal who made a bad decision. It's a zero-sum game. And since there are major costs involved in buying and selling securities, it ends up being a negative-sum game; traders (on average) under-perform buy-and-hold investors because of costs. That's just math.

If you want to be a trader, you have to assume you're smarter than the market. But before you do that, ask yourself, did you call the recent market top at Dow 15,000? Did you act on that conviction? Have you traded all the peaks and valleys successfully since then?

If you answered all of these questions "Yes," I have one more question for you: Why are you reading this column? You should be relaxing on a yacht off of St. Kitts. If you answered some of these questions "No," what makes you think you will do any better now?

But the "good trader vs. bad trader" theme is a minor issue. Here's the bigger point: Far from being dead, now is the best time in a generation to be a buy-and-hold investor.

The critics of buy-and-hold investing love to point to the fact that, after peaking in 1929, the stock market didn't regain its old highs until 1955. Their point is that the long run can be a very long run. And that's true.

But today is not 1929. We are a year and a half and 45% removed from the stock market peak in July 2007. Unless the S&P 500 is going to zero, we are a lot closer to the bottom than we are to the top.

So rather than looking at 1929, it makes more sense to look at 1932, when the market was down substantially but not yet quite at the bottom.

The table below showcases the growth of $10,000 invested in the S&P 500 for the 30 years starting in 1932. At the end of 30 years, the original $10,000 turns into $380,587. That's a 12.9% compound annual growth rate.

I'm not saying that we'll enjoy those kinds of returns for the next 30 years. They might well be lower. But the table makes the point: While 1929 was a terrible time to invest, 1932 was pretty darn good.

The traders have it wrong. The time for trading the market was the last 10 years. The time for holding the market is now.