Ashton growing up: September 2012

Buy and Hold:
Still Alive and Well

Meet Bill. He invested $10,000 in an S&P 500 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.

Here in the UK, Bill would have done just as well, despite suffering from One Direction as well as Justin Bieber. He could have turned £10,000 in a FTSE All-Share index fund into a smidgen over £20,000.

Morgan highlights a couple of typical analyst comments on the ‘futility’ of buy and hold:

“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.”

“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... Buy and hold is a relic of a bygone era when the economy was stable and consistent growth was the norm.”

Meanwhile, Bill has spent the last decade just getting on with the rest of his life, and generally having a great time. Yet he’s doubled his money using a supposedly dead strategy.

The period from August 2002 to August 2012 is actually pretty typical of the 10-year returns produced by the stock market over the last century or so. This goes against the thousands of colourful buy-and-hold eulogies written in the last few years, but it has the added benefit of being accurate.