In the good ol’ days of the 80s and 90s, “buy and hold” was added to the vocabulary of a lot of investors. Why? Because sell-offs were buying opportunities. Even the crash of 1987 was a great opportunity to buy stocks. But that 20-year period was a very small sample during a unique market environment. Historically, markets don’t act that way for very long. And when it ends, it’s ugly.
Investors have had to learn the hard way that this doesn’t work. “Buy and Hold” is called lazy where I come from. And I think this last decade proves my point. We talk a lot about short-term indicators and discuss the markets in days & weeks, not years. Today, let’s look at years.
Doug Short over at AdvisorPerspectives.com does a great job of updating inflation-adjusted charts of the major averages to show the real returns in the stock market. The first chart shows the nominal percent changes for the Down Jones Industrial Average, S&P500, and Nasdaq Composite since 2000. (Click Charts to Embiggen)
I know – pretty horrible for 12 years of returns, but it actually gets a lot worse. This next chart shows the “Real” returns for the major averages. Inflation is adjusted using the Consumer Price Index. And this has been a complete disaster if you were fooled into believing that “buy and hold” is an actual strategy:
I don’t think everyone needs to day-trade their retirement accounts. But some sort of active approach to a portfolio is clearly a necessity. It’s important to understand where the market has been if you want to have any clue as to where it can go. And in order to do that, we have to study price. This is where technical analysis comes in handy.
So finally, if you’re still not convinced that “buy and hold” is a myth, here is a chart showing Total Return and Real Total Return on $1,000 invested in the S&P500 on March 24, 2000:
Thanks but no thanks.
Tags: $SPX $SPY $DJIA $COMPQ