I’ve posted Entry #56 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Every Stock Investor Experiences One 20-Year Period of Poor Returns.
Juicy Excerpt: It is possible for non-timers to do just fine with their investments for five years or ten years or even fifteen years. That happens often. In fact, if you check the historical record, you will see that it is the norm.
The trouble is — Most of us are investing to finance our old-age retirements. To finance a comfortable middle-class retirement, you need to accumulate $1 million in capital or more. Unless you are a Cy Young Award winner, you are not going to be able to pull that off in five years or ten years or fifteen years. It’s going to take longer. That’s why non-timing stock investment strategies always fail.
Financial Success for Young Adults says
That’s why it’s such a good time to be coming of age and investing now. We’ve just hit a rough patch and we have the opportunity to buy in at prices that could be at a bottom.
Rob says
I’m with you, Financial Success. Also, we know more about how investing works today than we have ever known at any earlier time in history.
Thanks much for stopping by.
Rob
what says
So..over what 30, 40, 50, etc year time period did non-timing fail?
Rob says
Non-timing (Buy-and-Hold) failed at some point in the lifetime of every investor who has ever tried it, What. That’s the point of the article.
Some who are loyal to it today will say that it has not failed yet for them. But the Buy-and-Hold Crisis has not yet come to an end. If stocks continue to perform in the future as they always have in the past, it will fail for all of the loyal Buy-and-Holders of today too.
The mistake that the Buy-and-Holders make is that they look at only short time-periods. Buy-and-Hold worked great from 1982 through 2000. It provided amazing results. But that is not unusual. That is what it always does. Buy-and-Hold is a Get Rich Quick scheme and all Get Rich Quick schemes provide great results during the Get Rich Quick years. If they didn’t, no one would be interested in Get Rich Quick schemes!
It’s what happens after the Get Rich Quick years that matters. We are now in the post-GRQ era for this round of Buy-and-Hold. It is in the process of failing once again.
Nothing happening today should be a surprise to anyone familiar with the historical data. This is the same old scenario playing out one more time. The only reason why everyone doesn’t see that is that many of us only go back 10 or 15 or 20 years. The bull/bear cycle takes 35 years to play out. You need to look at 35 years to see an entire cycle. To see four entire cycles, you need to go back to 1870.
I hope that helps a bit.
Rob
Ron says
That is the challenge. We need to learn to invest with a long term perspective [ie 40 yrs +] while learning to live on a daily basis. If only it were easier to do this.
Rob says
Super comment, Ron.
It’s not easy. But I don’t think it needs to be as hard as we have made it in recent years.
Humans are social animals. We need to hear encouraging comments from our friends and neighbors and co-workers to stick to a long-term strategy.
We all need to keep in mind that it is not just our own personal results that matter. We should want our friends and neighbors and co-workers to invest effectively too. All of us together set stock prices. We all want stock prices to be set as close to the mark as possible. So we all need to help each other get the job done.
Once we adopt that attitude toward the investing project, I think we are going to see some amazing things happen. I am pessimistic about the short-term future of our country but I am wildly optimistic about what we are going to see after we descend into the Second Great Depression. Sometimes it takes some scary stuff to wake us up to a problem. But, once we wake up, we have a long record of tackling the problem like no one’s business.
Think Pearl Harbor. I believe that our descent into the Second Great Depression may end up being our financial Pearl Harbor. Pearl Harbor was a terrible event. But the full reality is that we came back stronger than ever in the years that followed. Look for a scenario similar to that playing out re this one too.
Rob
what says
I don’t think a market downturn during an investors investing lifetime is an accurate definition of ‘failing’.
I think your article failed.
It’s odd because you say that buy and hold only works over short time periods but in fact it only works over long time periods. And then on the other hand sometimes you say that if the time horizon of the investor is 30 years then buy and hold works no problem.
So…I think you might be confused about your own message (which would not surprise me since your message makes no sense).
Rob says
I don’t think a market downturn during an investors investing lifetime is an accurate definition of ‘failing’.
If you don’t achieve your investing goals, your investing strategy had failed, What. Buy-and-Holders always want to blame something other than their investing strategy. It’s the economy’s fault. Or it’s the market downturn’s fault. Or it’s those bad bankers. Or it’s those bad government programs that permitted sub-prime mortgages. It’s always something.
Maybe it’s just that Get Rich Quick investing strategies don’t ever work in the long run. That’s what I think.
Valuation-Informed Indexers have to live through market downturns too. The difference is that we lower our stock allocations when prices reach the insane levels that cause downturns. So we don’t take a big hit in a market downturn. That leaves us with far more money to invest in stocks at times when they are providing good long-term returns. Compounding does the rest.
And then on the other hand sometimes you say that if the time horizon of the investor is 30 years then buy and hold works no problem.
Buy-and-Hold always provides good results on paper after the passage of 30 years, What. But I doubt that it is ever more than a tiny percentage of Buy-and-Holders who see those results in their real-world portfolios.
Stocks were priced at three times fair value in 2000. Call that 3x. At the end of a runaway bull, stocks are always priced at one-half of fair value. Call that 1/2x. The difference between 1/2x and 3 x is a factor of 6, So the Buy-and-Holders will have lost 5/6 of their accumulated wealth of a lifetime before the crisis comes to an end. What percentage of those who lose 5/6 of the accumulated wealth of a lifetime are going to not sell a single share of stock while that result plays out?
You’ll say they all will. You’ll say no Buy-and-Holder will sell. I see it just the other way.
It is the fact that just about all Buy-and-Holders always sell that causes stocks to fall to one-half fair value in the first place. For stocks to sell at one-half fair value is just as insane as it is for them to sell at two times fair value. So how does it happen that prices ever get that low? It happens because Buy-and-Hold becomes popular from time to time and Buy-and-Holders experience so much emotional pain in acknowledging that their strategy doesn’t work that they hold on longer than others do before selling. It is when the Buy-and-Holders sell that we achieve capitulation and the market is able to recover.
The numbers look good for Buy-and-Hold at 30 years out because that is enough time for Buy-and-Hold to become popular again and for us to see insane valuations on the high side once again. If there were someone who actually held through the loss of 5/6th of his wealth, he would do okay. But it’s hard for me to imagine that it is more than 1 percent of Buy-and-Holders who pull that off in the real world. Have you ever heard of the name of a single investor who stuck with Buy-and-Hold through an entire bull/bear cycle? I haven’t. I wonder why.
Rob
what says
Sure, my dad did. And he is one wealthy dude because of it.
There are also many posters on the boglehead forum who did, and they are also quite well off.
Know anyone who did ‘Valuation Informed Indexing’ over a ‘full market cycle’? I don’t.
Most of the people who I know who try timing get caught up in it and end up hurting themselves. Psychologically it is a lot harder to try to time things than adhering to a typical boglehead IPS IMO.
I still don’t understand your use of ‘Get Rich Quick’ terminology when referring to strategies that take decades. I think you lose a lot of people with that utterly misguided use of the term.
Rob says
I agree with you that I lose people with that term, What. I use the term because I believe it is accurate and the accurate story needs to be told. But it is not a popular thing to do.
I use the term “Get RIch Quick” because Buy-and-Holders view gains in excess of those generated by the economic realities as real and lasting gains. Please consider what the word “overvaluation” signifies. When the market is priced at three times fair value, that means that it is mispriced, right? If you have $900,000 in your portfolio at a time when the market is priced at three times fair value, the real, lasting wealth in your possession is $300,000. Do we agree on that or do we not agree on that?
If you have $300,000 in your possession and you are planning your financial affairs as if you had $900,000 in your possession, you are engaging in Get Rich Quick thinking, are you not? You pushed stock prices up to insanely dangerous levels and then you treated the phony gains as real. If that’s not Get Rich Quick thinking, what is? How is that so different from what the investors in Madoff’s fund did?
Are you able to say what years your dad followed Buy-and-Hold strategies? I don’t want you to give out personal information if that makes you feel uncomfortable. So, if you don’t want to use your dad as an example, that’s fine with me. I’d like to know what was the greatest portfolio value drop suffered by someone who followed a Buy-and-Hold strategy through an entire Bull/Bear cycle. How much was your dad (or whoever else) down at the worst moment for Buy-and-Hold? Was it $100,000 or $500,000 or $1,000,000 or what?
I think that people need to know that number to know whether there is any realistic chance that a Buy-and-Hold strategy could work for them or not. Wade Pfau’s research shows that the maximum drawdown for Buy-and-Holders is 61 percent of portfolio value and that the number is 21 percent for Valuation-Informed Indexers. I view that as being a very big deal.
If your reference to the emotional difficulty of timing relates to those practicing short-term timing, I of course agree. If it is to those who practice long-term timing, I don’t get it. I would prefer a 21 percent drawdown to a 61 percent drawdown. And I would also prefer the much larger returns earned by Valuation-Informed Indexers. And I would also prefer knowing in advance what my return is going to be rather than waiting for surprises.
My view is that 80 percent of the emotion and risk associated with stock investing comes from following Buy-and-Hold strategies. If you only invest in stocks when they are priced to provide strong long-term returns, I am not able to see how you could mess up. Are you able to say specifically what you see as being the downside?
Rob