During the past several years, interest rates on savings and fixed income securities have been at record lows and the stock market has frequently gotten rocked (August 2011 is a great example) by news reports related to the world’s struggling economy, rampant unemployment, and the weight of a massive overhang of debt both here and in Europe. Because of such widespread uncertainty and volatility, the traditional investment mantra of “buy and hold” has largely died.
The best way to help you visualize why “buy and hold” is dead is a graph of the S&P 500 Index during the decade 2000-2010 (see Slide Show). You’ll notice that the return from the index during those years (excluding dividends) was a big, flat “ZERO”! For that reason, investment experts often refer to those years as “the Lost Decade”. The risk inherent in the market was not rewarded at all (much less “adequately) by growth in the value of invested assets! As a result, investment gurus have developed various versions of what I call “jack be nimble, jack be quick”.
Because of historically low rates on savings and this “Lost Decade”, more and more retirees (and those near retirement) realize that they can no longer trust their long-term financial well-being to the market, the government, or any single advisor or institution.
Illustrating the importance of this growing conviction is a study from three Ivy League professors that reports a grim fact: almost half of Americans die owning less than $10,000 (including those who completely outlived their financial resources). In the study, titled “Were They Prepared For Retirement?”, the authors note that, based on a replacement rate comparison, many of these households were deemed (just prior to retirement) to be well prepared for retirement. What caused these retirees to die with so little? The authors’ observe: “… with such low asset levels, they would have little capacity to pay for unanticipated needs such as health expenses or other financial shocks or to pay for entertainment, travel, or other activities. This raises a question of whether the replacement ratio is a sufficient statistic for the ‘adequacy’ of retirement preparation.” http://www.nber.org/papers/w17824
To amplify the reasons that “buy and hold” is dead, I have added slides on the stock price volatility reflected in such economically proven stories as Apple, Priceline, Google, and Chipotle. The market unmercifully “punishes” any stock that “misses” on earnings, revenues, or “guidance”. Being in such a stock during those periods is excruciatingly painful, just as being in the S&P 500 Index during the “Lost Decade” was incredibly frustrating. These are among the many reasons that “buy and hold” is dead. In fact, a recent study reported that the “average holding period” for a stock has utterly collapsed during the past forty years – from eight years to (now) just eighty days!
“Buy and hold” is dead, indeed!