Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Investing Long-term Buy and Hold Still Bad Advice

InvestorEducation / Learning to Invest Jun 24, 2009 - 12:43 PM GMT

By: Mike_Shedlock

InvestorEducation

Best Financial Markets Analysis ArticleIn spite of what you hear from main stream media and self-serving advice from Wall Street, an investment philosophy of long term buy and hold is not what it's cracked up to be.

Unfortunately, many boomers headed into retirement are finding that out now, at the worst possible time. Moreover, looking ahead, I doubt the next decade is not going to be much better than the last.


Please consider the following analysis from my friend "TC"
Recently a CalPERS spokesman was on CNBC talking about how they’re “managing” through the market downturn and how over the long haul they feel confident they’ll hit their 8% annual target. Also consider The house that Jack built, a MarketWatch article in which Jack Bogle reiterated his “buy and hold” investment recommendation.

Meanwhile in the same period my parents reiterated their successful and simple retirement strategy – CD laddering. This caused me to set out and look into greater detail about the market’s historical return, analyze buy and hold and see if an 8% annual market return target is even achievable.

My findings about the market from start to finish were of no surprise. The S&P 500 is down 32% over the past 12 months and down 31% over the past 10 years (-3.6%/yr). However, it’s the “long haul” where I’ve been promised and 8% annual return – and sure enough the returns did improve. The S&P 500 is up 100% (+4.7%/yr) over the past 15 years, up 500% (+7.4%/yr) over the past 25 years and up a staggering 5,313% (+6.9%/yr) since inception in 1950.

Although the annual ROI amounts fell short of the 8% target, it seemed reasonable that CalPERS in its infinite “wisdom” could outperform near 60 year market return by 1.1 annual percentage points.

However, the problem with looking at these returns is that they bare no semblance to reality. CalPERS or an individual doesn’t investment all their money on January 1, 1950 and then buy and hold. Rather individuals make regular contributions through their working years and dollar cost average into the market.

And according to CNBC’s clueless happy talker Dennis Kneale this is how individual investors can assure themselves they won’t lose and will make a killing in the market.

Due to different holding periods, the next references will all be related to Internal Rate of Return (IRR).

True to Dennis’ hope over the past 12 months a strategy of dollar cost averaging into the market improves an individuals’ IRR to -8.7% (compared with -32.4%). However, for the next 6 time periods, dollar cost averaging into the market actually hampered performance. Additionally, one has to extend the time period to at least 20 years in order to even show a positive IRR!

For example the 3 year time period resulted in -17.1%/yr (compared with -10.6%/yr) and a 15 year period resulted in -0.6%/yr (compared with +4.7%/yr). Fortunately, when you extend out the window to 38 years or more, dollar cost averaging once again works in your favor. But how many investors have been systematically investing this long?

Keeping my parents in mind, you’re probably wondering how someone did by simply investing in 6 month CDs. The answer is for any holding period of less than 25 years, a stock market investor who made regular and equal contributions has actually underperformed a CD investor! Yes, you read that right for time periods of 1 – 20 years a CD investor outperformed the stock market by 1.6 to 20.1 annual percentage points.

Additionally, if one extends the time window to 50 years (clearly “long term”) CDs again have outperformed the stock market by 0.3 annual percentage points. Even when one extends out the time period to the full 59+ years (the start of the S&P 500 index); the stock market has outperformed short-term CDs by a mere 0.2 annual percentage points – not much of an equity premium.

However, the problem with dollar cost averaging into the market is that over the long term is that uniform dollar cost averaging bares little semblance to reality. Individuals typically invest more each year as the value of their dollars fall due to inflation. In other words if they invested $10,000 annual today – they surely didn’t also invest $10,000 in 1980, rather they invested $4,000 (an inflation equivalent). To account for this, contribution limits on retirement accounts increase annually.

I reran the numbers using the annual 401k contribution limits for the weekly investment and the results surprised me.

Imagine you’re 55 years old, investing for the past 25 years and looking to retire. Assuming you invested $250,000 (roughly the 401k maximum over the time period) you now have about $725,000 – not too bad right? Meanwhile “my parents” experienced none of the volatility and have just over $800,000. Which would you choose?

Now imagine you’re in your early 40s and investing for the past 15 years. Assuming you invested $175,000 (roughly the 401k maximum over the time period) you now have less than $150,000 – a loss of nearly 18% over a 15 year horizon. Meanwhile, “my parents” experienced none of the volatility and have over $300,000 – nearly an 80% gain. It is going to be near impossible for today's early 40s investor to overcome this 116% divergence. Even if the stock market doubles tomorrow “my parents” are still ahead of the average market investor.

Buy And Hold Vs. CD Laddering



To help show this disparity of an IRR of -1.3%/year vs. +3.9%/year over 15 years I included a chart of return per $10,000 invested. Looking at the above chart one should quickly realize they either need to be active investors or stick to simple, unsophisticated CD investing.

TC is ignoring dividends, and stock selection. Then again stock selection would imply some activity as sectors fall in and out of favor.

One simple, active strategy that would have avoided the stock market holocaust in both the recent recessions would be to get out of the market when the yield curve inverts and stay out until the NBER announces the recession has ended.

Treasury Yield Curve 1999 To Present


Length of US Recessions 1900-Present


The above chart from Chart of the Day as posted in Trader's Narrative.

Using the above two charts one would have exited the stock Market in Spring of 2000 and reentered in November of 2001. One would have exited the stock market in Summer of 2006 and would still be out.

One could have improved returns by buying long dated treasuries after exiting the stock market. Of course one can improve upon the CD strategy by buying 6 months treasuries, switching to 10 year treasuries when the yield curve inverted and back after into 6 month treasuries when the yield curve gets sufficiently steep.

Regardless of what strategy one uses, it is a horrible idea to hold stocks thought recessions.

Why Is Bad Advice So Common?

Clearly, stay the course is bad advice. So why is it so common? A personal anecdote might help explain things: In January of this year, an investment advisor from Wachovia Securities called me up and stated "Mish, I am sitting on millions because I see nothing I like". I told the person I did not like much either and that Sitka Pacific was heavily in cash and or hedged. His response was "Well, I do not get paid anything if my clients are sitting in cash".

I called up a rep at Merrill Lynch and he said the same thing, that reps for Merrill Lynch do not get paid if their clients are sitting in cash.

Massive Conflict of Interest

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so it is every recession, bad advice permeates the airwaves and internet "Stay The Course".

A Look Ahead

Clearly stocks are a better buy now than in 2007 or 2008. But that does not mean stocks are cheap. Indeed, by any realistic measure of earnings, stocks are decidedly not cheap. Then again, 6-month treasury yields are yielding a paltry .31%.

Can equities easily beat that? Yes they might, but that does not mean they will! Fundamentally, the S&P 500 can easily fall to 500 or below, a massive crash from this point. Alternatively, stocks might languish for years.

Please consider a chart of the Nikkei.

$NIKK - Nikkei Monthly Chart


The Japanese Stock Market is about 25% of what it was close to 20 years ago! Yes, I know, the US is not Japan, that deflation can't happen here, etc, etc. Of course deflation did happen here, so the question now is how long it lasts. Even if it does not last long, there are no guarantees the stock market stages a significant recovery.

Buy and hold is no more likely to be a good choice for the next 5 years than it was for the last 20.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules