If you’ve heard it once, you’ve heard it a thousand times: we’re enjoying the longest bull market ever. It’s been pretty good for buy-and-hold investors (for the most part). But I’m convinced that buy and hold returns will be horrible for the next five to 10 years.
As I see it, there are three main flaws with Wall Street’s buy-and-hold mantra, which is really a deceptively dangerous “strategy” to follow:
- It’s enticingly believable,
- It’s highly dependent on luck (but no one will tell you that), and
- In reality, 99% of investors can’t follow it (and I have the data to prove that).
Understanding these flaws is the first step toward embracing a more proactive, profitable approach.
So today, let’s explore that first flaw…
You see, the pitch for buy-and-hold is enticingly simple and believable. In the short run, stock moves are difficult to predict; but over the long run, stocks go up.
To be fair to the establishment’s “buy-stocks-and-just-hold-them-forever” mantra, stocks have indeed been a powerful wealth-builder for more than a century.
Clearly the U.S. equity market exhibits a bullish bias over the long-run – namely because of earnings, inflation and, in more recent years, the simple fact that Baby Boomers have used it like a retirement piggy bank.
Stocks have earned average annual returns roughly in the range of 6% to 10% over many decades and market cycles. And that’s why proponents of buy-and-hold have a leg to stand on. It’s hard to argue with the stock market’s long-term track record.
So, Wall Street tells you…
As long as you have enough time, between today and retirement – you should just buy and hold!
You should ignore the short-term gyrations of the market… and simply have faith that, in the end, your buying and holding will ensure you participate in the modern world’s most powerful wealth creator: the stock market, which, as we all know, has always gone up in the long run.
Frankly, this story line makes an enticing argument for buy-and-hold.
It’s difficult to trash an idea that seems so logical and realistic. And that’s why troves of investors, for decades, have “bought” what Wall Street’s been selling.
Unfortunately, there’s a sneaky little lie tucked into the sales pitch for buy and hold.
That is… It requires a commitment that most investors I’ve met simply are not able to make. A commitment to be in stocks for the “long haul.”
It’s generally true that it’s very, very unlikely you’ll lose a lot of money if you hold stocks long enough – and here, “long enough” is 20 to 30 years… a really long time.
Take a look at this chart…
It shows the range of annualized returns you might expect to earn if you hold stocks for 20 years or for 30 years.
See? No negative numbers.
While it’s common to lose 5% or 10% in a given year, it’s rather unlikely you’ll lose that much each year if you hold for 20 or 30 years.
But, take a closer look at the lower range of this chart…
The 0.7% annualized return, when holding for 20 years!
True, that’s not a negative number.
But it is downright measly!
Buying $10,000 of stock and earning 0.7% annualized for 20 years… that gets you to $11,497 in two decades!
So, you could start investing when you’re 40… and still be darn poor when you’re 60 (and hoping to spend your “golden” years relaxing on a beach, or playing shuffleboard).
You see, Wall Street tells you that stocks go up in the long run so buy and hold. But they fail to mention that, sometimes, they go up very little!
And that’s first flaw with the buy-and-hold mantra. It’s enticingly believable that “stocks always go up, in the long run.” (They have.)
But if you’re hanging your hat on 0.7% annual returns, I’m pretty sure you’ll be at least a little disappointed with Wall Street’s go-to advice!