From the time I started investing for the long term, almost all the advice I’ve read has pointed towards buying stocks (usually in the form of index mutual funds) and holding them for decades, rather than following trends in the news and trying to buy and sell stocks frequently. The reasons for this strategy were always similar to these:
- Stocks are risky and volatile, but provide the best opportunity for growth over the long term with annual average returns of 7% to 12%, depending on whom you ask, higher than any other type of investment.
- Trading costs money thanks to fees, and these fees eat into your returns. They exist to help brokers get rich, so brokers encourage you to trade.
- Index mutual funds allow you to invest in stocks for a low cost. Other mutual funds try and mostly fail to beat the indexes, and charge higher fees regardless of their success.
- Index funds also allow you to broadly diversify, reducing your exposure to the success of any company you invest in.
Have these fundamentals changed? A recent article in MSN Money claims that the advice is a lie. The reason for this is that the “level of risk in the stock market changed violently” in 2007. If this were true, investors who believed they built a moderately risky portfolio including stocks and bonds or cash prior to 2007 would suddenly have a riskier portfolio. I was under the impression that stocks were always risky, which is why they provide the opportunity for the largest long-term growth.
Looking back at 2007, it’s quite easy to pinpoint the exact moment you should have sold stocks. It’s also easy to look at what was happening in the market, point at something, and declare it was a “sign” that it was time to get out of the market.
I am still sticking with “buy and hold” as a long-term growth strategy. Yes, if I were to sell my investments now, I would lose a large amount of invested money. But I’m not selling now, I’m still buying.
Have the fundamentals changed? Are stocks riskier now or is this volatility just a side effect of the risk that has been there all along? Is the “buy and hold” strategy just a fad that is no longer relevant for today’s stock market?
Published or updated February 23, 2009.