I find it rather amusing that six weeks of a horrendous market can lead so many people to declare that a “buy and hold” investment strategy is no longer viable. The evidence for such a claim is quite unimpressive, in my view. They assert that people who invested in the broad U.S. equity ten years have lost money so far, so “buy and hold” doesn’t work.
Seriously? Yes, if you made a lump sum index fund investment in November 1998, waited a decade, never invested another penny, and sold today, you would have lost money over that time. “You would have made more by putting your money in the bank!” True again, but none of these arguments are very convincing. Let me explain why.
The stock market in the late 1990’s traded at the highest valuation ever recorded. That was not a good time to invest in the market with only a lump sum. Conversely, today stocks are trading at the lowest relative valuation since the early 1980’s. Those who use the last decade as evidence that “buy and hold” does not work anymore are simply telling us that buying high and selling low is a losing strategy. We already know that.
How many investors invested a lump sum in the late 1990’s, never added to their investment, and sold recently? I don’t doubt that some people did that (because they traded on emotion, not analysis) but to conclude that those few instances prove that a long term passive investment strategy is a bad idea is nonsense.
One way to avoid buying high and selling low is by dollar cost averaging into the market by adding to one’s investments over time. 401(k) investors contribute a certain percentage of their income to their plans in equal (typically bi-weekly) amounts. Other investors try to max out an IRA every year to ensure they are always adding to their investments in order to build wealth faster over time. For people who follow those investment principles, even if they choose an index fund rather than active portfolio management, the fact that the market trades lower today than it did in November 1998 is irrelevant.
People are misguided if they believe they will always get rich by investing a lump sum of money in the market, regardless of price, by not following the investment or adding to it over time. Just because some investors have learned that lesson the hard way, it certainly does not mean we should proclaim that “buy and hold” is dead.
One final point. Unlike ten years ago, stocks today are quite cheap on a historical basis. As a result, I would be willing to bet that ten years from now the market will be meaningfully higher than it is today. Ironically, naysayers are out there advising people against doing just that.