1. Analyze your goals, risk tolerance, time horizon, etc.,
2. Select an appropriate asset allocation (mix of asset classes),
3. Select individual investments to use for each asset class,
4. Regularly rebalance your portfolio back to the original asset allocation, and
5. Change the asset allocation as your goals, time horizon, etc. change.
The problem with buy and hold - as with any investment strategy - is that there are times when it doesn’t work. Even with all dividends reinvested, a $10,000 investment in theS&P 500 on March 24, 2000 would only be worth $8,510 as of July 12, 2010!
That’s the kind of performance that has many people declaring that buy and hold is dead.
Performance of the S&P 500 Index*
(10 Years Ending 7/14/10)
The chart above shows the performance of the S&P 500 index over the past 10 years. You can see that while the “buying” part might be easy, it’s the “holding” part that can test your nerves.Believe it or not, even though the S&P 500 is still in negative territory, other asset classes have had positive growth over the past decade. A properly diversified portfolio with exposure to US small-cap, developed international, and emerging market stocks, bonds and REITs would have realized positive returns over the past 10 years.*
Even if you had only invested in the S&P 500 over the past 30 years - a strategy I certainly wouldn’t recommend! - you would have still made money if you had been patient enough to ride out the ups and downs. The chart below shows the S&P 500 index over the past 30 years.
Performance of the S&P 500 Index*
(30 Years Ending 7/14/10)
Many people view the negative performance of the S&P 500 over the past 10 years as proof that buy and hold will never work again. This viewpoint is shortsighted, in my opinion, because no single investment strategy can be expected to outperform all of the time.
In fact, buy and hold actually worked over the past 10 years for asset classes other than large US stocks. The moral of the story is to hold a diversified portfolio with multiple asset classes, rebalance regularly, and avoid bailing out at the first sign of trouble.
Buy and hold is an excellent strategy as long as you are aware of, and comfortable with, the pros and cons associated with it.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.
*The performance figures and charts in this post are for informational purposes only. Past performance can't and shouldn't be used to predict future returns.
