I recently introduced you to the first flaw of Wall Street’s buy-and-hold mantra; it’s enticingly believable. Even though it’s fair to say that stocks go up in the long run, equity markets can go decades without producing what we’d consider a decent return — unlike those we’d see using an active investment strategy.
Consider the fact that Vanguard’s Jack Bogle, who was one of Wall Street’s most prominent buy-and-hold advocates, expected stocks to return just 4% over the next decade.
Is this a case of stocks going up in the long run? Sure. But there are other more lucrative ways to invest your money. Certainly you’re not going to make good money buying and holding in this type of market! And that brings us to the second flaw of the buy-and-hold doctrine.
It’s Highly Dependent on Luck
Success with buy-and-hold depends on whether or not you were lucky enough to begin investing just before a major, secular bull market…
In short: Your “starting point” has a huge impact on the long-term success of your buy-and-hold strategy.
As an investor, your starting point is highly dependent on when you were born, when you begin your career, and when you begin routinely saving and investing discretionary income. The thing is… you can’t really do anything to change the clock of life. And you can’t do anything to change the market’s clock either.
All you can do is hope that you’re lucky enough to begin investing just as a secular bull market is taking shape — for better, or for worse!
Take a look at this chart…
It shows the buy-and-hold returns for various chunks of time between 1929 and today. Do you see what I’m getting at here?
The returns of buy-and-hold are extremely dependent on your starting point. If you were lucky enough to begin investing in 1944 or in 1982, then your fortunate starting point allowed you to follow the buy-and-hold mantra and do well — earning a cumulative 983% in 20 years (12.7% annualized), or 1,090% in 17 years (15.7% annualized).
You can’t complain with that, right?
But if you started investing with buy-and-hold in 1929, 1965, or 2000… Well, you were nowhere near as lucky! You’d have earned a measly 8% cumulative return in 14 years (an awful 0.6% annualized) — a loss of 6% with buy-and-hold between 1965 and 1981. And you could’ve earned around 84% with buy-and-hold between 2000 and 2017 (just 3.7% annualized).
Luck Is Required Elsewhere, Too
If you think about it, luck also plays a big role in your success or failure in other markets as well.
Think about those who bought homes in Florida in 2005 or 2006, just before the housing market crashed and the values of their homes dropped as much as 60% or more…
Many of these folks moved here with good intentions to retire, or to begin a new career… not knowing the timing of their life’s clock was tragically unlucky!
Buy-and-hold has worked just fine for some investors — those who were lucky enough to start investing at just the right time. For everyone else, buy-and-hold has failed them. Those who were simply unlucky in their starting point missed out on incredible opportunities.
The good news is that you can escape this destiny-by-luck scenario simply by taking control of your investments and embracing the methods of an active investor.
Active investing isn’t about day trading. It’s about utilizing a small handful of proven strategies, aimed at outperforming the buy-and-hold method in both the short run and the long run. And the way I see it, active strategies are the best way to break free of the lady-luck element of buy-and-hold.