Buy And Hold Forever? Maybe Not

By Dian Vujovich

When I was a broker back in the very early 1980s, investors enjoyed double-digit returns on both taxable and tax-free bond investments, most equity mutual funds came with a 8.75 percent up-front sales charge and investing for the long term is what folks were told was the way to achieve financial security.

I always wondered about that “long term” part, though. Especially when it came to stock funds and getting past the hefty sales charge, i.e. “load”, that fund shareholders had to pay. It seemed like a sales pitch to cover costs and turns out, it pretty much was.

Then, like today, plenty of people held individual stocks in their portfolios that they could buy and sell at any time — hopefully for a profit — but it was a different deal for stock funds. They were “buy-and-hold” and “for the long-term” investment vehicles. Period.

I understand why those selling securities then, as well as now, preach that philosophy, particularly when fat commissions and sales charges on the vehicles they’re selling are involved. But I never have understood what long-term or buy-and-hold really means because what’s a long holding period for a lovely cougar could seem like an eternity to say, her pool boy.

In InvesTech Research’s Nov. 14, 2008, newsletter (www.investech.com check-out the Sample Issue), editor James Stack referred to the Nobel Prize-winning economist Paul Samuelson. “He postulated a simple thesis that the longer one invests, the greater the risk — due to the chance that you will encounter that once-in-a-multi-generation event that no one expects,” writes Stack.

To make his point, Stack looked at the performance of the S&P 500 index (with dividends reinvested) decade by decade from 1930 to 2000. The returns? Of the eight decades, the only down one was the nearly eight-year time frame that we’re currently in. Beginning Jan. 1, 2000, and ending Nov. 11, 2008, that index was down 32.5 percent. It’s lower now.

Other than today, the most sluggish decade was from 1930 through 1939, when the market was up only 1 percent.

The decade with the plumpest gains began on Jan. 1, 1950, ended on Dec. 31, 1959, when the index grew 482.7 percent. Not far behind it was the roaring 1990s, with a plus return of 430.8 percent.

Huh. Maybe long-term investing is best looked at in decade increments? Now there’s a plan.