It’s not sexy but it’s effective.
Recall from the earlier “Have A Strategy” page that “Buy and Hold” was identified as the only strategy the Investing For Retirement investor should employ.
Here is the description of the Buy and Hold strategy repeated for your convenience:
Technique: Investor purchases same security over a long period of time, continues to buy and hold the same security through the ups and downs of the market until s/he needs to sell it to support retirement. Investor NEVER, EVER sells the security until the proceeds of the sale are needed during retirement.
Problem: Identifying a security that is safe to hold over a long period of time; one that can’t go out of business or suffer catastrophic failure. One where you don’t have to worry that the CEO is sleeping with his secretary. We will recommend a safe security later in the presentation.
Ignore Volatility – It Comes Out in the Wash
The market moves on news! For example, in 2008, the USA market lost 7% in one day when it appeared that the US might default on its government bonds. The entire market suffered large losses when it appeared that Greece would have to declare bankruptcy, etc. The market fell 600 points when England announced they were leaving the EU.
There is only one investment strategy that can prosper under these circumstances. It is the strategy of “Buy and Hold“.
Volatility is a normal part of investing. Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years observed had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.
History is On Your Side shows that no matter how severe the loss, the market always recovers and moves up. Every investor in the world believes this to be true, otherwise there would be no market. No one would buy a stock if they didn’t think it would appreciate in value.
Miss The 10 Best Days
The chart below shows what happens to a $10,000 investment if you were not fully invested during the 20 year period, 12/94 – 12/2014. If you weren’t following a Buy and Hold strategy, there is every chance that you would have been out of the market during one of more of these “best” days – especially since six of the 10 best days occurred within two weeks of the 10 worst days.
To be clear if you were not invested during the 10 best days of the market, you would have lost half the value you would have had.!
How the “Typical Investor” (i.e. not you) Fared
For any 20 year period starting in 2003, the average fund investor failed miserably to match the performance of the S&P 500. Why? Because they were selling when the market went down and buying back in when they were convinced it was going up. We call that a “Sell Low, Buy High” strategy. In case you missed it, the correct strategy is “Buy LOW, Sell HIGH”.
May Not Be Appropriate With Individual Stocks
The Buy and Hold strategy may not be appropriate with individual stocks. Companies can go bankrupt and their stock becomes worthless. This is not the case with a VTI or any other broad based fund. They cannot become worthless.
Given that you are Investing For Retirement and are in for the long term (40-50+ years) Buy and Hold is the best strategy.
A Buy and Hold strategy allows you to sleep at night. Knowing that you are not going to sell your portfolio, even when the market is tanking, allows you sleep at night and have sweet dreams instead of nightmares. This is so because you know the market will eventually turn around. Then the shares you bought at a discount when you dollar-cost-averaged your purchases, will leverage your investment.
We at Investing For Retirement™ guarantee that if you buy and hold our recommended securities you WILL Buy Low, Sell High!
Here are several articles that reinforce this concept,
Return to IRA Strategy