From the time I started investing for the long-term, the majority of the advice I’ve read has pointed towards buying stocks and holding them for decades. Most specifically, this advice is usually recommending stocks in the form of index mutual funds.
This is in strict contrast to the practice of following trends in the news, trying to buy and sell stocks frequently. The reasons that this strategy was being recommended were always similar to these:
- Stocks are risky and volatile. However, they provide the best opportunity for growth over the long-term, with annual average returns of 7% to 12%, depending on whom you ask. This is higher than any other type of investment.
- Trading costs money. This is 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. Of course, they also charge higher fees regardless of their success.
- Index funds also allow you to broadly diversify. This reduces your exposure to the success of any company in which you invest.
So, I’ve been hearing this same advice for many, many years. But have these fundamentals changed over time?
An article in MSN Money claims that the advice above is a lie. The reason for this is that the “level of risk in the stock market changed violently” in 2007. Essentially, things have changed, so your strategy should, too.
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.
Of course, hindsight is 20/20, and none of us know exactly what the market will do in the future. Just as those investors in early 2007, we can only guess… even today.
Today’s market has bounced back from 2007-2008. Most investors — those who held their ground — have regained all that they lost and then some, and are enjoying today’s present market. But there are rumblings of the next big crash, and when/how hard it will hit.
This is why my advice is always to hold on to investments for the long-term, regardless of what the market does. Once you buy stocks, you buy them forever. If you go into it with that mentality, it’ll make it much easier to weather those big dips, waiting for prices to recover.
It may take time for a market crash to bounce back, but that’s why adjusting your allocation over time (especially as you near retirement) is so important. Being able to invest your money and ride out the storms without panic is key to letting your portfolio grow.
As for me, I am still sticking with “buy and hold” as a long-term growth strategy. If (or when) the market crashes again, I will hold on to what I have and weather the drop. Selling low is the easiest way to lose money in the long-term, and I’m not interested in throwing my hard earned savings away.
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?
I don’t think so. I believe that buy-and-hold is even more important now than ever before. And if you held on to your stocks after 2007-08, you’re probably right there with me.
Do you question the value of buy-and-hold? Why or why not? Sound off below!
Updated July 20, 2017 and originally published February 23, 2009.