Buy, Hold… Hope?

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By Perry Bean, Wealth Advisor

One of the most common investment philosophies is the “buy-and-hold” approach. Essentially, the idea is that investors own stock for the long-term and “ride out” market downturns given it is very difficult to time the market. While there is extensive evidence that this can be an effective strategy, it does not mean that it is ideal for all investors.

The buy-and-hold investment philosophy is often backed-up by some variation of the “10 best days” statistic. One such variant is as follows:

If you were fully invested in the S&P 500 from 1/1/2000 through 12/31/2019, you would have been up 224%

If you missed the 10 best days for the S&P 500 during that 20-year period, you would only have been up 62%

While this certainly demonstrates the importance of staying investing when the market is down, there is more to the statistic that is often left out:

If you missed the 10 worst days during that same 20-year period, you would have been up 581%

This less quoted statistic shows the power of avoiding down days. That said, it’s often rebuffed by the buy-and-hold camp with the following statistic:

During that same period, 60% of the 10 best days happened within two weeks of the worst 10 days

While this statistic is accurate as well, it’s important to take a closer look at the data and add context. For example, the best day for the S&P 500 during that 20-year period occurred on October 13th, 2008, when the S&P 500 climbed 11.6%. While that’s a massive one-day move, the S&P 500 was still down 35% from its 2007 peak. Additionally, after that big up day, the S&P 500 continued to fall another 20%. In fact, it would be another 4 years until an investor, who was invested since the 2007 peak, would break even.

All this said, challenging the notion that investors should buy, hold, and “ride out” market volatility does not mean that it advisable for investors to haphazardly sell their stock investments. While there are alternatives to “riding out” market downturns, they require a plan and an effective strategy.

 

JPMorgan Guide to the Markets. http://www.retirementandinvestmentgroup.com/wp-content/uploads/2020/05/Principles-for-Successfuly-Long-Term-Investing-2020-Edition.pdf

Missing the Best & Worst Days of the Market. https://aaiila.org/wp-content/uploads/2020/05/Tuchman-Best-and-Worst-Days.pdf

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