Buy and Hold: Still Alive and Well

Meet Bill. He invested $10,000 in an S&P 500 (INDEX: ^GSPC  ) index fund 10 years ago and checked his account balance for the first time yesterday morning. He's elated to see his investment is now worth $19,590 after all dividends were reinvested.

Bill knows a thing or two about market history. He knows that, historically, he earned a good return -- 7% a year, or close to average. He remembers that during that decade we endured two wars, a housing bubble, a collapse of the financial system, the worst recession since the Great Depression, 10% unemployment, a near shutdown of the government, a downgrade of U.S. debt, and Justin Bieber. Through it all, he managed to nearly double his money without lifting a finger.

"Buy and hold works wonders," he thinks to himself.

But then he starts reading market news. Almost without exception, he finds that commentators have declared buy and hold dead, using the last decade as proof.

Buy and Hold Is Dead (Again) is the title of one popular book. "Holding an index or mutual fund for decades will not work for today's investor as spikes in volatility and risk can quickly wipe out any gains," one article warns.

"The only way to make money in the equity market is to be nimble, and that means adopting a strategy that is not buy and hold," he reads. "Buy & hold is a relic of a bygone era when the economy was stable and consistent growth was the norm," another analyst laments.

"What are these people talking about?" Bill wonders. He spent the decade visiting his kids, taking trips to the beach, reading good books, and enjoying life -- and managed to double his money all the while. These professionals, it seems, spent the decade poring over financial news, trading obsessively, stressing themselves relentlessly, and they're bitter about the market.

Bill knows why they're bitter. They didn't double their money. They likely lost money. Most traders do -- a fact he's well aware of. The only people who think buy and hold is dead, he realizes, are those frustrated with their inability to follow it.  

Bill is fictitious, but the numbers and analyst quotes here are real.

Going back to the late 19th century, the average subsequent 10-year market return from any given month is about 9% a year (including dividends). If you rank the periods, the time from August 2002 to August 2012 sits near the middle of the pack. What we've experienced over the last decade has been pretty normal, in other words. This goes against the thousands of colorful buy-and-hold eulogies written in the last few years, but it has the added benefit of being accurate.

And even it understates reality. The S&P 500 is weighted toward the market cap of its components, a quirk that skewed it toward some of the most overvalued companies in the last decade. An equal-weight index -- one that holds every company in equal amounts and provides a better view of how companies actually performed -- returned more than 140% during the decade.

Why have so many declared buy and hold dead? I think it's all about two points.

First, if Bill started investing just two years earlier, his returns through today would be dismal. 2000 was the peak of the dot-com bubble; 2002 was the depth of its aftershock recession. Bill started investing when stocks were cheap, setting him up for good returns today. The majority of today's investors, who likely began investing during the insane late '90s, have fared far worse.

But that doesn't prove buy and hold is dead. It just proves that the deluded interpretation of it -- that you can buy stocks any time at any price and still do well -- is wrong. But it was always wrong. It just became easy to forget during the '90s bubble. For as long as people have been investing it's been true that if you pay too much for an asset, you won't do well in the long run. If you buy the S&P 500 at 30 or 40 times earnings, as people did in the late '90s, you're going to fail. If you do like Bill and wait until it's closer to its historic average of 15-20 times earnings (or even better, lower), you'll do all right. Nothing about the last decade has changed that. The '90s, not the 2000s, were the fluke.

Second, most people know that buy and hold means holding for a long time, like 10 or even 20 years ("Our favorite holding period is forever," says Warren Buffett.) But, in an odd mental twist, they use volatility measured in months or even weeks to reason that it doesn't work.

The market suffered all kinds of schizophrenic turns over the last decade. Since 2002, there have been 401 days of the Dow Jones (INDEX: ^DJI  ) rising or falling more than 1.5%, and 83 days of it going up or down more than 3%. These can be emotionally devastating for investors following daily market news, watching their wealth surge and crash before their eyes.

But Bill didn't even know about them. He was too busy enjoying his sanity at the beach. He knew he was investing for the long haul, and that he bought at a decent price. Why should he care what stocks do on a daily, monthly, or even yearly basis? While others tumbled through manias and panics, Bill's blissful ignorance was one of his greatest advantages -- as it is for most buy-and-hold investors.

Naysayers of buy-and-hold investing lose track of this to an almost comical degree. The "flash crash" of 2010 sent stocks plunging for 18 minutes before rebounding. Last week's snafu by market-maker Knight Capital caused a handful of companies to log some funny quotes for half an hour. These events should be utterly meaningless to long-term investors. Yet the number citing them as proof that buy and hold no longer works is astounding.

Jason Zweig of The Wall Street Journal quoted an investor last week dismayed with the Knight Capital fiasco. "You could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes," he said. The same fear was echoed two years earlier during the Flash Crash.

Folks, accept some frank advice: If you measure your portfolio in five-minute intervals, you shouldn't be investing. If you think business value is "lost" by a few misquoted trades, you shouldn't be investing. Value is created when a business earns profit, allocates it wisely to its owners, and compounds year after year. An errant stock trade doesn't make a company less valuable any more than misplacing your birth certificate for 18 minutes makes you less alive.

"There's no such thing as a widows-and-orphans stock anymore," Zweig's investor complains.

Sure there is. Ask Bill.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (54) | Recommend This Article (163)

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  • Report this Comment On August 07, 2012, at 7:44 PM, Crosshair wrote:

    Great article, but just one comment. Bill's "ignorance is bliss" approach served him well. But, as you mention, had he begun investing just two years earlier, his returns would not have been as impressive. This fact highlight the need for some degree of "active participation" by investors if they wish to avoid the pitfalls associated with paying too much for securities, namely low investment returns.

    Buy and hold "quality" investments should be the prescribed approach, which implies that one needs to periodically keep any eye out on fundamentals. A mindless, periodically set contribution approach to investing may prove hazardous to one's finances.

  • Report this Comment On August 07, 2012, at 7:54 PM, actuary99 wrote:

    "First, if Bill started investing just two years earlier, his returns through today would be dismal."

    That's an important flaw in your argument. Which could be easily fixed by assuming he bought fixed dollar intervals of the S&P (in addition to reinvesting dividends) at fixed intervals of time.

    Not saying I don't generally agree with your article, but it should be noted Bill isn't a good role model due to what you noted in quotes above.

  • Report this Comment On August 07, 2012, at 8:01 PM, TMFMorgan wrote:

    ^ Dollar cost averaging $100 a month over the last decade produced a return (net of contributions) of $4300. Since 1871, that's still middle of the pack (adjusted in real terms).

  • Report this Comment On August 08, 2012, at 2:32 AM, MichaelDSimms wrote:

    Buy and hold is a good model, just pick the right buy.

    T, INTC, XOM, GOOG all seem to being pretty well.

    I have owned 3 of these 4 and still own 2 of those 3.

  • Report this Comment On August 08, 2012, at 10:15 AM, jpanspac wrote:

    I feel exactly the same as Bill.

  • Report this Comment On August 08, 2012, at 10:35 AM, Darwood11 wrote:

    "For as long as people have been investing it's been true that if you pay too much for an asset, you won't do well in the long run."

    That's possibly one of two of the most important statements in the article. The other is "Why should he [Bill] care what stocks do on a daily, monthly, or even yearly basis?"

    I take long business trips from time to time and the occasional two week vacation. During those periods I may not see the daily market analysis, people like Mad Money Cramer disappear over the horizon and I generally lose touch of daily financial matters. It's surprising how on my return (I call it surfacing) that I am generally inundated with "news" which is meaningless to a long term investor, which is what we each should be. After all, the goal is to build a nest egg for retirement, isn't it? On return to the "surreal world" I find that I really didn't miss anything. Most financial events are more of the same; Europe'd debt woes, travails of Wall Street, larceny, chicanery in politics and so on.

    I had the same thought as actuary99, and most long term investors who are building an IRA or 401(k) would seem to use some form of incremental investing, be it DCA or simply monthly purchases over their working lifetime.

    Zweig's investor quote "You could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes" doesn't quite ring true to me. Yes, I suppose if I put everything into one basket, ala' Enron or whatever, I could go down in flames. But what sane investor does that?

  • Report this Comment On August 08, 2012, at 11:10 AM, Melaschasm wrote:

    Some people who spend a tremendous amount of time researching and investing can beat the market. For most people it is better to put a percentage of their income into a few market funds every paycheck, and let three decades of time generate enough returns to provide for retirement.

    The secret to the sucess of buy and hold, is that most active investors have a tendency to buy high and sell low.

  • Report this Comment On August 08, 2012, at 11:51 AM, astuber9 wrote:

    Crosshair you make a good point, although for a lot of us our 401k index fund is the majority of our investing. I think set it and forget it is mostly OK. It's not like most of us have a pile of cash to start investing with and care about market timing, we just start contributing 6% of each paycheck when we get out of college. Why do I need to analyze individual companies if I have an index fund? I don't ever see myself moving money from equities until I get older and start shifting to bonds. I may be tempted to temporarily move my portfolio to a money market when I think the market looks particularly scary but Morgan and other financial writers have pointed out the folly of this strategy many times.

  • Report this Comment On August 08, 2012, at 12:26 PM, Crosshair wrote:

    Hi asturber9 - you don't need to analyze individual companies, just pay attention to current market multiples to ensure you're not investing in a market that is historically over-valued. I think Morgan explains it well here:

    "If you buy the S&P 500 at 30 or 40 times earnings, as people did in the late '90s, you're going to fail. If you do like Bill and wait until it's closer to its historic average of 15-20 times earnings (or even better, lower), you'll do all right. Nothing about the last decade has changed that. The '90s, not the 2000s, were the fluke."

    To clarify, this is NOT a call for one to feverishly devote time analyzing market fundamentals and react to the constant flow of "news" put out on a daily basis. Simply, one needs to be cognisant of broad market fundamentals and invest accordingly.

  • Report this Comment On August 08, 2012, at 12:59 PM, Crosshair wrote:

    @ astuber9 - In case you're wondering where you can find a market P/E for the S&P 500, try here - http://www.multpl.com/

    Also, the WSJ publishes other useful multiples here (including the overall market dividend yield):

    http://online.wsj.com/mdc/public/page/2_3021-peyield.html

    I apologize in advance to the Fool if this information is available here, but I found it quickly elsewhere!

  • Report this Comment On August 08, 2012, at 5:41 PM, MyPortfolioGuide wrote:

    Good example and I wish more people thought like "Bill". There is a huge difference between buy and hold and buy and forget though....

  • Report this Comment On August 08, 2012, at 5:41 PM, eldetorre wrote:

    "Value is created when a business earns profit, allocates it wisely to its owners, and compounds year after year."

    The problem is that as more and more investors seek short term returns, and punish companies for failing to deliver, It impacts would be value investors. Executives make poor decisions to line their pockets rather than looking out for shareholders.

  • Report this Comment On August 08, 2012, at 5:44 PM, mals wrote:

    In my case Buy and Forget worked to my advantage twice. In 1983 I bought 200 shares of CIBC at $22 Cdn with dividend reinvestment option. Today it is worth 938 shares at roughly $74. Since I moved to USA, I have been paying 15% non-resident tax to Canada. I also bought 400 shares of Canadian Tire at $12 a share. Without dividend reinvestment, it is now worth about $62 a share, not counting the dividends accrued.

  • Report this Comment On August 08, 2012, at 5:48 PM, irvingfisher wrote:

    Keep in mind that Justin Bieber is still around to depress future returns.

  • Report this Comment On August 08, 2012, at 6:12 PM, VolBeast56 wrote:

    We will survive Justin Bieber.

  • Report this Comment On August 08, 2012, at 6:18 PM, stlmikey wrote:

    Contributing 15% of your pay a year to a well diversified set of funds will cure most retirement ills.

    Morgan, I almost always enjoy your well thought out articles.

  • Report this Comment On August 08, 2012, at 6:41 PM, Seanickson wrote:

    its easy to look at the last 12 years and say that buy and hold is dead because the returns have been subpar during that period. This of course overlooks the 18% annual returns we had for the previous 18 years from '82-2000. However, the bad times will always stick more in an investors mind than the good ones.

    The investors that owned stocks at the top of the bubble are fortunate that the crash wasn't more severe.

    I believe we are still above the trend line, indicating that the stock market is somewhat overvalued. I would advocate owning high-quality predictable companies

  • Report this Comment On August 08, 2012, at 7:37 PM, JULPAC wrote:

    I agree completely w/ this article. I've read that investing should be done like surfing - you won't want to catch a wave at its crest, but at its beginning. And if you miss a wave sit & wait for the next one.

  • Report this Comment On August 08, 2012, at 7:41 PM, rhealth wrote:

    Excellent story Morgan! Myths are the signposts by which we find our way.

  • Report this Comment On August 08, 2012, at 8:21 PM, AJNewbie wrote:

    Mathematically, its a very vague algo which can be used to justify both sides of the argument because the "when" in both the actions is left out.....

    The only sense I see is not to be forced to sell when the market is low, so that the investments can ride the downturn.

    Other than that, no one has seen the future, so have a strategy that allows you to sleep in peace.

  • Report this Comment On August 08, 2012, at 9:11 PM, NOTvuffett wrote:

    Morgan, this has been bothering me for awhile. Of course, everybody wants to own shares of a company going gang-busters. Unrealized capital gains aren't taxed of course, but what about real ones? Capital gains aren't indexed to inflation.

  • Report this Comment On August 08, 2012, at 9:21 PM, petrogold wrote:

    I saw all your monotonous arguments .

    If buy and hold without any withrawal of earned income what is the use of such investments?

    Invest & forget thus other people will eat and enjoy your money? So sad...

  • Report this Comment On August 08, 2012, at 9:33 PM, mikecart1 wrote:

    When you get cable, you get bored...

    When you get bored, you start investing in individual stocks instead of index funds...

    When you invest in stocks, you buy GM...

    When you buy GM, you lose all your money...

    When you lose all your money, you punch out your broker...

    When you punch out your broker, you punch in your first day in jail...

    Moral of Story:

    "Don't invest $10,000 in the old GM stock 10 years ago. Invest in index funds and get DirecTV."

    :D

  • Report this Comment On August 08, 2012, at 11:20 PM, NOTvuffett wrote:

    that was pretty funny mike. you are right. index funds probably safest way to invest now for the young investor or one with not much money.

  • Report this Comment On August 08, 2012, at 11:24 PM, portefeuille wrote:

    ... and if you do not want to buy and hold you might want to consider this chart -> http://farm8.staticflickr.com/7132/7714722226_44b83f26a6_b.j... ;)

    I suggested that green trend line in June 2009. Still does alright :)

    http://caps.fool.com/Blogs/chart/743508.

    Being overweight biopharma stocks might also not be a bad idea (my "fund" is in the green by around 45% since inception in March 2010).

    http://caps.fool.com/Blogs/fund-trades/749743.

    http://twitter.com/portefeuillefun.

  • Report this Comment On August 09, 2012, at 1:18 AM, mmmm101 wrote:

    sure wish i'd have done what bill did. sleepless nights, stressed out on family vacations, making sure i had my iPhone with me when i went to the bathroom... sigh! of course, i enjoy trading. that's why i do it! but it's true, i'd be a lot richer if i didn't trade. life!

  • Report this Comment On August 09, 2012, at 1:37 AM, Synchronism wrote:

    I concur with the spirit of Morgan's article.

    Many professionals seem to share this misconception about "buy and hold", one that pervades the mentality of even retail investors. They look down on the strategy, and the moment I mention my favorite phrase "time arbitrage" in front of even an intern, I receive scoffs, snickers, and disdain in reply.

    The potential of "buy and hold" is maximized through a sound analytical process, the ability to dissociate from the vagaries of the market and focus on the "stuff that matter" even if it means doing nothing and letting your IRRs fall for a few quarters or so, and above all, faith in oneself.

    @ NOTvuffett:

    Sure, it's safe for the young investor. But why would you encourage this?

    People learn best from mistakes. To quote something I saw on a trading card in my HS days, "Experience is the best teacher, but not a kind one."

    Reading books, even articles in the Motley Fool, cannot facilitate internalization as well as an actual loss, a missed opportunity, or a strong and VERY recent news article can, provided they are not disheartened to the point they lose faith in equities and fixed-income securities as asset classes.

  • Report this Comment On August 09, 2012, at 2:20 AM, GeoDG wrote:

    Morgan et al -

    I've been a fool for two years now, and I while I read absolutely everything that's sent to be by The Motley Fool (TMF), I've never commented on an article.

    This is one of the better, if not the best, articles that I've read from TMF. It's very easy for those unfamiliar with investing to understand, and it contains many valid points.

    I understand the objections to some of the components of the article, but I still believe it's an excellent piece for the general public.

    I plan to send this to everyone I know that has asked me about investing and/or financial planning.

    Thanks so much.

  • Report this Comment On August 09, 2012, at 3:50 AM, ch1012 wrote:

    Great piece. You have an idiot on your hands here who's bought fool products for years but can't find out how to start / implement the suggestions from Gems and the other basic monthly newsletter Toms best buys and the brother.

    So about this article, wonderful, I have 10 k in an IRA I will buy and hold, but What should I buy to hold I don't know how to structure the thing. Anyone willing to give a suggestion - yep I've read the boards. For as long as I've bought fool products I have not invested a penny. I just dont know HOW TO START with a simple structure of the IRA. I call the guy at Raymond James, list Toms or Davids best buys now - he says 'that doesn't make sense, just invest $200 a month into the mutual funds we set up. Told you I'm an idiot, I still buy the newsletters :)

  • Report this Comment On August 09, 2012, at 4:40 AM, kyleleeh wrote:

    @mikecart1

    LMFAO

    @ch1012

    I would go to Vanguard and put it in the Vangaurd 500 index fund. It's a no brainer that will automatically reinvest gains and dividends and they have very low fees.

  • Report this Comment On August 09, 2012, at 8:13 AM, hightimes1 wrote:

    @ch1012:

    Buy or borrow a copy of Daniel R. Solin's book "The Smartest Investment Book You'll Ever Read", and follow his advice. His recommended course is "indexing". It's easy, it's prudent, and it's very likely your best bet. And don't delay because, quite simply, to allow time to pass without investing when you have the resources is to so, is to squander perhaps the best opportunity you'll ever have to make money for your future.

  • Report this Comment On August 09, 2012, at 9:41 AM, rpl3000 wrote:

    @ch1012

    I was in the same boat as you two years ago. I just read a bunch of stuff and never did anything.

    In 2009-10 I bumped my company 401k to the max and started a Roth (also maxed out). I missed a bunch of the upswing from the 2008 bottom but I'm not a trader. I've got the 401k distributed in small - mid - large - international - and a bit bonds. I just picked the lowest expense ratio for all the categories. For the Roth, I've got everything in dividend paying funds (only 2 at the moment) and reinvest. It doesnt seem to matter much if you pick the S&P funds or the dividend funds. They pretty much hold the same companies. Most big blue chip divident payers are the same divident payers on the S&P funds. (anyone please chime in if my amatuer analysis is wrong or can add to it).

    Also, if you feel that things are too expensive at the moment. Just buy the money market fund. Saving money directly still counts as investing in my book.

    I do have to say that i'm so glad that I started it. I wish I'd started sooner. I think everyone says that.

  • Report this Comment On August 09, 2012, at 10:11 PM, NOTvuffett wrote:

    patches222, tell us what you really think, lol.

  • Report this Comment On August 10, 2012, at 12:22 PM, pomahlosh wrote:

    My constructive criticism to this article is that the author really should've also included the 5 and 15 year returns not just 10 years.

    It was mentioned in school or possibly books I've read, that there is no 15 year period in the 200 some odd year history of the stock market, that an investor would've lost money. This may or may not have changed w/ the financial/mortgage crisis many of us have been through several years ago.

    Ultimately, more time will definitely either support or disprove these numbers. It's critical to be aware of this, because it goes toward your decision making in when to start allocating less and less risk in your portfolio, from the perspetive of not just diversification of stocks/mutual funds (i.e., international, specific industry, S&P500, etc.), but lower risk investments (i.e., bonds, CD's, your mattress...)

  • Report this Comment On August 10, 2012, at 7:48 PM, MCCrockett wrote:

    Having worked as a software, network, and security engineer for the last 40 years, I was forced into the strategy of "Buy and Hold". The 96 hour "days" of my youth have been cut back to 18 hour "days" and I'm still too tired to spend hours pouring over financial reports to do anything but "Buy and Hold".

    The money that I rolled out of a former employer's 401(k) into several IRA accounts in 2003 has tripled in value.

    I don't own any mutual funds. Instead of subscribed to investment advisory services.

    One advantage of "Buy and Hold" is that your dividend yield is often 2 to 3 times higher than what is reported by the financial press based on my average cost. Where do you get 6 to 10 percent interest on your money?

  • Report this Comment On August 11, 2012, at 10:58 AM, donell101 wrote:

    I agree with buy and hold, but not in the stock market. Your stocks are at high risk of loss, and if you have stocks you lost about 40% TWICE in the past 10 years. I like Fixed Indexed Annuities for retirement growth. Most are indexed against the S&P 500 and you are never at risk for loss of principle or credited interest. Sure, you might not gain in a down year, but you will never LOSE your money. Add an income rider to provide an income you can never outlive because even after your money runs out the insurance company must continue payments. What happens if you die before you use your money? Your beneficiaries get the money and there is no probate requirements.

  • Report this Comment On August 11, 2012, at 4:32 PM, Chris1016 wrote:

    "You could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes," ---Zweig

    If that company paid a 4% dividend for those 15 years you'd have a net $0 invested (discounting inflation, of course). It's rare that a business goes down with 0 remaining value so whatever is left is your profit.

  • Report this Comment On August 11, 2012, at 10:17 PM, NOTvuffett wrote:

    gawd chris sounnds \\\\\\ like i need to cipher out natural logartighs, lol

  • Report this Comment On August 12, 2012, at 3:53 AM, daveandrae wrote:

    I remember August of 2002 very well.

    The s&P 500 was trading at a market price of 937 and falling. It would fall an additional 17% over the next few weeks before it bottomed out at 775. In fact, the index, already down more than 36% from its 2000 bull market high, had been falling irregularly from a peak of 1525 over the previous two years.

    Thus, truth be told, the general public was not net buyers of U.S. stocks in August of 2002. They were, large, net sellers! In fact, if you were to juxtapose the "investment performance" of the index over the last ten years against that which matters most, the typical Investor's return, the result would be horrifying.

  • Report this Comment On August 12, 2012, at 6:26 PM, sqsimpleton wrote:

    Nice idea. However, I can tell you that I left federal gov't employ in August of 1997 with $65,000 in the S&P 500 index fund, where it has sat for 15 years. It's now worth $105,000. Not a doubling, and 97 was significantly before the big time runup of 98 - 2000. The P/E for all of 1997 was just over 22; current P/E just over 16. That's gives me an annualized return of 3.25% I do realize that you said it's a matter of what you pay, but the simple fact is that we live when we do. We put money in when we are earning it. We don't live in other lifetimes or in the theoretical 10 year periods that you state. I have continued to invest in a similar way in my new job, with a Vanguard fund. 10 years til retirement. I hope the rate of return picks up. I don't trust myself to invest my retirement money otherwise, as much as my reading of MF tempts me to.

  • Report this Comment On August 14, 2012, at 5:16 PM, TheDumbMoney wrote:

    sgsimpleton,

    This is a good point. I have blogged about this here, and many others have written about it, including Morgan: Stock returns are "lumpy:" entire decades may be great, entire decades may be terrible.

    Books like Jeremy Siegel's make it seem like stocks are uniformly great because of their 6.6% annualized post-inflation return over 200 years, or whatever. But the real story of stocks is that there are entire decades (or more) where they suck, and twenty-year stretches where they are great. This happens again and again and again, and largely relates to market valuation. The insane P/E of the late 1990s, the culmination of a bull market that began in the early 1980s, was just the latest iteration of this cycle.

    Buy and hold "works" if you buy and hold for thirty or forty years. But over any given ten, fifteen, or even twenty-year period it may not work at all -- unless you are a spectacular stock-picker. This is why it is so absolutely crucial to ratchet up purchases during times of market turmoil. This is also why bonds have been such an important portfolio component for the last fifteen years; they have generated tons of outperformance.

    Kudos to you for holding an S&P Index fund for fifteen years and not messing with it though.

    DM

  • Report this Comment On August 15, 2012, at 4:20 AM, daveandrae wrote:

    Dumb Money-

    As I type, my equity portfolio (which has grown from five figures into six) is more than four times larger than it was in August of 2002. This compares to a 7% annualized rate of return from the s&p 500...and I have made just about every mistake in the book.

    Thus, please remember that the dominant, determinant, of Investor return, is driven primarily, not by the "investment performance" of ones portfolio, but by the behavior of the investor, himself.

    Put simply, at the end of your life, approximately 5% of your real world, investment return, from equities, will have been determined by such things as "stock selection" and "market timing". The other 95% of your return will be determined by what YOU were doing, or should I say, more importantly, not doing....especially when, not if, your portfolio is down 30-50% from its peak.

    Good day.

  • Report this Comment On August 15, 2012, at 9:06 AM, Mathman6577 wrote:

    I've bought and held over the last 30 years, mainly in boring stocks like PG and JNJ and an index fund, occasionally adding to positions (like Apple). Amateurs like me aren't going to time the market well and there are no get rich quick schemes out there. It takes time to get rich (or at least comfortable). The key is to not watch CNBC and buy into the daily doom and gloom.

  • Report this Comment On August 15, 2012, at 11:46 AM, hank321 wrote:

    ch1012

    I do not use indexes; but I enjoy studying equities, watch my investments closely, and I rarely trade. I am NOT a momentum trader at all, as generally speaking, amateurs fail at this.

    I selectively sell when equity markets are high, and i have a large gain in something (>25%). I collect cash in bond funds or ETFs (schwab, or fidelity mostly) and switch out of bonds to carefully selected equities or ETFs during macro downturns.

    I strongly favor dividend equities, including REITs and MLPs; but i do invest in a few growth stocks (example, DDD).

    If you have an IRA, you might consider putting half into a diversified dividend ETF like HDV, and half into a safe high quality income blue chip, like KO or Kimberly Clark. And then watch what happens for a few years. Keep adding to your diversification each quarter or two. Ideally, you want to own at least 15 equities, probably split between etfs and firms, in different sectors. One or two should be international, probably. Much depends on your age, or how close you are to planned retirement. If you are over 45 or so, play it more safe than a 30 year old might.

  • Report this Comment On August 15, 2012, at 1:36 PM, TMFMorgan wrote:

    <<Nice idea. However, I can tell you that I left federal gov't employ in August of 1997 with $65,000 in the S&P 500 index fund, where it has sat for 15 years. It's now worth $105,000.>>

    I suspect you're not including dividends into that calc. My data shows an S&P 500 index fund returned 138% from 97 through today, including dividends. $65k should be worth $158,000 today.

  • Report this Comment On August 15, 2012, at 2:01 PM, Mathman6577 wrote:

    W/o dividends, the SP500 is up about 9% on average each year since 1982. I'll take it. My best stocks (besides Apple) have averaged 16-18% a year.

  • Report this Comment On August 15, 2012, at 2:02 PM, Mathman6577 wrote:

    I also agree w/ Hank321 regarding dividend stocks and REITS/MLP's.

  • Report this Comment On August 15, 2012, at 2:13 PM, TheDumbMoney wrote:

    daveandrae,

    I congratulate you on your returns and I'm not sure how you are disagreeing with me or if you intend to at all, or otherwise, with due respect, the point of your response to me. What I am talking about is investor behavior. And the starting date for measuring the beginning of performance is all-important as well.

    DM

  • Report this Comment On August 15, 2012, at 2:20 PM, TMFMorgan wrote:

    <<Books like Jeremy Siegel's make it seem like stocks are uniformly great because of their 6.6% annualized post-inflation return over 200 years, or whatever.>>

    His books make it clear that returns are anything but uniform.

  • Report this Comment On August 15, 2012, at 4:02 PM, TheDumbMoney wrote:

    Morgan, fair enough, it has been a long time since I read it and I have likely forgotten that.

  • Report this Comment On August 15, 2012, at 4:27 PM, daveandrae wrote:

    DM-

    I vividly recall when Simon Property Group (symbol- SPG) was selling for less than its tangible net asset value, or a market price of 20 dollars a share in March of 2000 AND yielding 9% in dividend income.

    Mind you, this was during the peak of the last secular bull market, when the Nasdaq was approaching 5000 and the s&p was approaching 1525.

    Today, SPG is trading well over 155 a share. I know, because I sold out of it in March of 2000 in order to buy more Cisco and EMC.

    Thus, I can tell you from experience that "ten year rolling averages" mean nothing. Unless, of course, you're an index investor.

    As an individual stock investor, I have learned, very much the hard way, that that which matters most, is to never forget to ask the basic question of "how much?" .....These two words have driven my error rate down to virtually zero over the last four years.

    Good day :-)

  • Report this Comment On August 16, 2012, at 11:34 AM, TheDumbMoney wrote:

    daveandrae, again, interesting, but I'm not sure what you're responding to in my posts.

  • Report this Comment On August 16, 2012, at 12:30 PM, bpa169 wrote:

    All that I would like to add to this great article is I bought 25 shares of Apple in June 2010 @$200 with a definite buy and hold philosophy. I'm not convinced anytime soon that I should be selling considering MF still rates it a buy!

  • Report this Comment On April 20, 2013, at 1:35 PM, ponysean wrote:

    "If you buy the S&P 500 at 30 or 40 times earnings, as people did in the late '90s, you're going to fail. If you do like Bill and wait until it's closer to its historic average of 15-20 times earnings (or even better, lower), you'll do all right. Nothing about the last decade has changed that. The '90s, not the 2000s, were the fluke."

    Isn't this the opposite of buy and hold? This would be called buying low and selling high, makes much more sense.

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