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Why Buying And Holding Is Dangerous To Your Retirement
Copyright 2006 Equitrend, Inc. When someone tells you that the dam is breaking, do you just stand there and get washed away by the floodwaters? Why does the professional management industry give you that advice for managing your retirement? Why did trillions of dollars get lost in the millennium bear market due to the bad advice of passive money management? The Latest Research A study by three academics from the London Business School was recently reported in a great Wall Street Journal article titled "Long-Term Risk Is Underestimated," goes a long way toward debunking the myths of long- term investing. Professors Elroy Dimson, Paul Marsh, and Mike Staunton dispelled the buy-and-hold notion by observing, "not only can markets take a long time to recover, but also investors generally underestimate what the safe long-run period is to hold stocks." Just how dangerous this Buy & Hold myth can be is seen in another finding of the study, which is that "out of 16 major national stock markets, investors from only five would have been guaranteed positive annual returns over every 20-year period during the past century." That's pretty staggering. Most people feel it's a slam-dunk that they're going to win over 20 years.
Of course, that presupposes they won't fall prey to another problem, which is survivor bias. It's quite possible that even if the market worked out over 20 years, the handful of stocks they picked might not, as most people who bought Internet stocks can now see clearly. The article also exploded one of the present-day myths. “You know, the market's been down three years in a row, and therefore it can't decline for a fourth”, as positioned by so many pundits. The professors' response to that is: "The history of stock market performance shows that across 16 markets, the probability of a fourth down year is 40%.
That also happens to be the probability of any other year being a down year." The Bear Ate My Retirement The millennium bear market will go down in the history books as one of the worst bear markets to date. For those of you who are young and have time on your side, you should be able to suffer through the years it takes to get back to break-even. If you are nearer to retirement, your retirement plans have probably been altered. There are many sad stories documented about people just like you who have lost much of their retirement savings to the millennium bear market. I can only plead with you to evaluate trend timing techniques to grow and protect your precious assets. Invest with, and not against, the market and let the mathematics of an advancing and declining market work in your favor.
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