August 2011: Thoughts on Buy and Hold

Dear Clients,

By now, most of you are accustomed to hearing from me at the beginning of each quarter.  But due to the recent market volatility and increasingly negative news, I thought I'd drop a note just to let everyone know my thoughts on the current market climate.  Although in advance, I must commend all of you on your calm demeanor over the last several weeks and months.  At this point, I have communicated with most of you via phone or e-mail, and no one has displayed any desire to abandon their investment discipline or make any type of emotional trading decisions.  I have great clients.

This is a market that can certainly test your resolve.  Consider this data that I pulled this weekend: over the month of August, the S&P 500 index (an index of the 500 largest companies in the US) made daily moves of greater than 4% - up or down - a total of six times.  And we have only had fifteen trading days in the month so far!  To put this in perspective, for the past year through the end of July, there have been no trading days where the S&P 500 moved more than 4%.  That's right, zero, zip, nada.  (All data pulled from Yahoo Finance, for those interested).  In addition, the markets have moved down significantly and are now in the red for the year.  During times like these, the financial press likes to trot out lots of dismal statistics regarding long term returns.  In fact there have been several articles recently about the 'Lost Decade' where S&P returns have been essentially flat for the last 10 years.  Which brings me to the topic of this letter, buy and hold investing.

Thoughts on Buy & Hold
(Or: Statistics Don't Lie, but Statisticians do)

Although pundits and talking heads seem to glom onto the negative statistic, I don't think it is relevant for several reasons, but the most important is this: most people don't invest this way.  It certainly is a gloomy statistic, don't get me wrong.  If you plopped down money on the S&P 10 years ago, you are essentially flat (-3.3% to be exact - not including dividends paid out).  But let's look at this time frame a little closer.  You can check it out in the chart below from Google Finance (click to enlarge):

As you can see, there have been a lot of twists and turns along the way.  What if you had bought in late 2002? Plus 24%.  What about mid 2006?  Minus 12%.  The point is, that by arbitrarily picking your start point - and by focusing the conversation on the "hold" part you can paint a pretty skewed picture.  In fact based on the chart above, you can see that there were some periods like March 2003 and December 2008 where if bought you were probably quite pleased with the results.

At Bootstrap Capital we are certainly long term investors.  But we are not strictly buy & hold investors.  I believe that a risk-appropriate and diversified asset allocation is the best way to manage a long term investment portfolio.  Without getting into an exact portfolio model, you can see in general what would have been happening in the above chart: during 2002-3 a client would have been selling bonds and buying stocks which had fallen.  During the boomlet from 2003 through 2007, the client would have been selling a portion of their stocks as they appreciated in price and invested in bonds.  During 2008 & 2009 the reverse would have happened and the client would have sold bonds and purchased stocks.  So again, a disciplined investment strategy would have helped you buy low and sell high.  Over time this, coupled with regular saving and investing, is the key to success.

I'd like to leave you on a somewhat more upbeat note.  As I've discussed with all of you, I think most investors are too short term oriented.  All of us will be saving and investing for much longer than 10 years.  Here is a similar chart showing the return of the S&P for the last 30 years (click to enlarge):

Total return over the 30 year time frame: 753% or 7.4% per year.  And that does not even include the dividends you received which range from 2-4% during the period.  This time frame includes several recessions, and at least three major market corrections, and some pretty awful hair styles.  Yet you still would have made 7.4+%!

If your friends and family have questions about the recent market volatility or any other financial issue, please don't hesitate to make an introduction or forward this letter.  We provide Financial Planning and Investment Management services and would be happy to talk with your acquaintances.  We will treat your friends and family with the same care and diligence that we treat you.

 
Thanks,

Brian McCann