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“extra” return here or there. There is a bromide for that, too:
Churn and burn. And pay commissions for the privilege.
It is possible to reduce the whole investment process to a
series of three-word maxims: Make your plan. Keep on saving.
Allocate your assets. Buy and hold. Review every year. Rebalance
if needed. In this context, buy-and-hold does not stand out as
egregious, does it?
Even so, the buy-and-hold obituaries are being published
today for a reason. The bear market of 2007-09 devastated
so many 401(k) and other portfolios partly because it was
incredibly severe, surprising some “experts.” “Hang on,”
they said, “it could be worse.” So, many people hung on
and, sure enough, it got worse.
Another monstrous aspect was that the bear market
affected most asset classes simultaneously, which temporarily
rendered diversification almost useless as a bomb shelter.
While the U.S. stock market sank 55.4 percent from Oct. 9,
2007, to March 9, 2009—as measured by the Dow Jones
Total Stock Market Index on a total return basis—the ex.-
U.S. markets collectively sagged 59.5 percent.
The decline came equally from developed and emerging
markets. Developed ex.-U.S. markets fell 59.1 percent, as
the countries’ leading banks had been suckered into the
Only bonds, the Mr. Magoo of the market meltdown,
sailed through serenely [outside of the riskier corporate
credits]. As interest rates fell, bond prices rose; interest
rates could not fall below zero, though Treasury
bills briefly reached that point. The Barclays Capital U.S.
Aggregate Bond Index, from Oct. 9, 2007, through March
9, 2009, rose 7.2 percent. Since then, through Nov. 20, it
has risen 8.2 percent.
So, what does buy-and-hold get you in this mess? It does
not completely protect you from the bear, but neither does
it leave you hopelessly bereft. To illustrate, take a simple
asset allocation that can be executed with readily available
investment vehicles. We put 60 percent into risky assets,
comprising 35 percent in U.S. stocks, 15 percent in ex-U.S.
stocks and 5 percent each in commodities and U.S. real
estate. The remaining 40 percent goes into less risky U.S.
bonds. For this exercise, we do not rebalance.
Indexing this portfolio to 100 on Dec. 31, 1998, it reached
a year-end high of 186.5 on Dec. 31, 2007. It subsequently
fell 34 percent to 123.1 by March 9, 2009, but from that
point through Nov. 20, 2009, recovered 34.9 percent to
166.0. From beginning to end, the annualized return is 4.8
percent—not what one would have wished, of course, but
So, what does buy-and-hold get you in this mess?
It does not completely protect you from the bear,
but neither does it leave you hopelessly bereft.
subprime mortgage follies. (See United Kingdom, Ireland,
Iceland … etc.) Emerging markets dropped 61.9 percent,
but they recovered the fastest because they were unsophisticated
enough to not have become mired in the sour
credits. Emerging markets shot up 110.9 percent from
March 9 through Nov. 20, 2009, while developed ex-U.S.
markets jumped 78 percent. The U.S. market placed third,
gaining 65.2 percent.
Securities representing the commercial real estate asset
class were hit even harder, yet they rebounded spectacularly.
Using the same dates as above, though they do not fit
exactly, the DJ U.S. REIT Index sank 71.3 percent and since
March has recoiled upward by 105.7 percent. The DJ Global
ex-U.S. Select REIT Index fell 70.7 percent but bounced back
just 103.4 percent.
Commodities slumped, too, helped along by crude oil’s
deflation from $145 a barrel. The DJ-UBS Commodity Index
dropped 56.9 percent from its high point on July 2, 2008,
through March 2, 2009. Since then, through Nov. 20, the
index has jumped 32.4 percent. By the way, a literal buyand-hold
strategy would have worked out okay with commodities.
In the 10 years ended Nov. 20, 2009, the DJ-UBS
Commodity Index racked up a cumulative return of 95 percent,
or 6.9 percent annualized.
tolerable if there is still time before the kids’ tuition comes
due or retirement rolls around.
And if there is not time? Then, indeed, pain is inflicted.
But buy-and-hold bears only a fractional share of the blame.
What happened to “review every year” to take into account
changed circumstances (i.e., the shorter time remaining
until the planned-for happening)? Was “rebalance if needed”
observed or neglected? The Hon. Jim Cramer blames
buy-and-hold for lulling investors into laziness, and he has
a point. But methinks being lazy predates careless investing
by more than a few millennia.
I write not to disprove what the (honorable) deathdecree
promoters say, but I am here to declare what I do
know: Buy-and-hold was my friend, just and faithful to me.
And buy-and-hold has brought many others’ portfolios
home to sufficient fulfillment, without paying tribute to
brokers and advisers. What cause is there now to turn away
from this gentle admonition?
Oh, judgment, thou art fled to brutish beasts, and men
have lost their reason. Bear with me; my heart is in the
coffin there with buy-and-hold, and I must pause till it
come back to me.
Ross Wiedman contributed research to this article.
www.journalofindexes.com
January/February 2010
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