With the popularity of active asset allocation programs, read market timing, on the rise we noted some analysts who were noting that a good old fashioned buy and hold strategy might be the best way to approach the next few years.
Indeed the performance of the market this year might very well reinforce the notion that the stock market is the way to go over the long term. At the Ticker Sense blog:
The stock market’s comeback in 2009 has probably reinforced the old adage, “the market always comes back”. That view has received considerable currency from Jeremy Siegel’s book, Stocks for The Long Run (SLR), which details the performance of the US market since 1802, and contends that over any long period stocks will outperform.
Their point being that the data used to construct this longer term stock case is at best ambiguous. Indeed trying to say what while happen in the 21st century based on thin 19th century stock data does seem a bit incongruous (and nostalgic to boot).
Taking a look at some more recent data shows that of late we are facing a unique situation. Where the stock market has underperformed the performance of the 10 year Treasury bond over the past twenty years. From the graph below one can see that the relative performance of stocks vs. bonds over the intermediate term strongly favors stocks.
On the face of it the results from the graph are compelling. However making a definitive case from just a couple of data points is tenuous at best. So where does that leave us? For many the buy-and-hold case seems like many to be buy-and-hope. From Richard Russell via The Pragmatic Capitalist:
In the stock market hope get in the way of reality, hope gets in the way of common sense. One of the first rules in investing is “Don’t take the big loss.” In order to do that, you’ve got to be willing to take a small loss.
For others the case against buy-and-hold investing is just the manifestation of longer term market cycles that make the attractiveness of certain strategies wax and wane over time. As James Paulsen of Wells Capital Management writes:
Today, after a decade of stock market blues and after the worst financial panic in the postwar era, “buy-and-hold” is again dead! Most believe the “world will never again be the same,” and investors should prepare for profiting from volatile and trendless markets by adopting strict “trading rules.”
Also he The Oblivious Investor writes:
For most market-beating strategies, the reality is that they’ll stop working soon after they’re discovered by the major market players…To date, a buy & hold indexing strategy is the only one I’ve found that provides answers that satisfy me.
In the end, market timing vs. buy-and-hold may very well be a false dichotomy. Trying to time between the two approaches may be a task fraught with timing risk. Who has a decade to wait and see whether their approach turned out to be the correct one?
What investors should be plotting is an approach that melds the two schools of thought and allows one to advantage of major market trends while maintaining the ability to mitigate against large market downswings like we saw this past year.
This is no easy task. While any such approach may be in a strict sense suboptimal it serves the purpose of keeping you in the investment game over the long run. And isn’t that what we are all truly trying to achieve?