This article is Part I of a series discussing the fallacies of always owning stocks for the long run (aka “buy and hold” and passive strategies). Given the current bull market is not only long in the tooth compared to prior bull markets, but sitting at valuations that have always been met with more severe declines, we believe the points made in this series of articles are important for investors to understand.
One would think that following two major market corrections of over 50% within the last two decades, investors would have a better appreciation for how much time it takes to compound your way out of losses. While buy-and-hold investors who stayed true to their strategy over the last two decades are indeed ahead, they lost many years of valuable compounding time in a quest to “get back to even.”
Just recently, Michael Lebowitz tweeted a chart that highlighted the issue of the time required to “get back to even.”
The tweet, and graph, was a simple reminder that markets spend a good deal of time declining and retracing those declines. These are long periods when investors are not compounding their wealth. As he noted:
“This fact should be top of mind given ‘history, risk levels, and valuations.’”
Not surprisingly, his tweet quickly sparked rebuttal from some promoters of “buy and hold” investment strategies. Of note was a Tweet from Dan Egan.
Dan thinks that Michael’s message is “Fear Mongering.” If presenting factual data, and highlighting the certainty of market cycles, is fear mongering then maybe he is right. If so, he might also want to consider that investors should be fearful given current valuations and the economic underpinnings of corporate earnings. If fear is what it takes to help investors understand the next five years will likely not be similar to the last five, then it will have served a valuable purpose.
Read the full article at Real Investment Advice: The Myths of Stocks for the Long Run – Part I | Real Investment Advice