Buy and Hold -Freak of Nature

By: Jack Funderburk Click author's name for more of his/her articles

Are you pleased now that your investments have moved back up to within 20-30% of their high mark of September 2007 after having fallen much lower into March 2009? Are you still hanging on to your parents buy and hold strategy as your primary means of investing?

Buy and Hold - an Anomaly

Over the next few years, the current generation is going to awaken to the idea that buy and hold was a very useful form of investment strategy during a major bull market. However, the facts will bear themselves out in the coming years that while this simple strategy worked for the last generation it will play havoc on the current generation.

The simple yet "successful" buy and hold strategy of the last generation was a freak of nature. Because we were moving up in a very long-term up trending market it worked! You may want to consider, from a historical perspective, what your chances are of retiring as wealthy as the last generation using this same concept.

Perspective

Since 1982 until 1999 all the equity markets had been rallying to new record highs in the strongest bull market of the century. During those years a huge inflow of cash entered the stock market through institutional investors (pension funds, banks and insurance companies) as well as the new guy on the block - mutual funds.

By the end of the last century the mutual fund industry had grown to over 6000 issued funds. This added some hundreds of billions if not trillions of dollars into the mix along with the big money groups.

All Our Generation Knows is Up

Since this bull market has been so long and so huge in dollars, our generation knows nothing of depressions and little of long-term recessions, the last of which was 1966-1982. How old were you back then? How about you - were you invested during that sideways market?

A Technical History Lesson Reveals Something Other Than Bull Markets:

Bear Markets 1802-2000 Bull Markets

1802-1812 (recession) 1815-1835

1835-1843 (recession) 1843-1853

1853-1861 (depression) 1861-1881

1881-1896 (recession) 1896-1906

1906-1921 (recession) 1921-1929

1929-1949 (depression) 1949-1966

1966-1982 (recession) 1982-1999

2000- ?

The Government Effect

If you think you see a pattern forming of shorter to longer recessions / depressions then you've noticed something that is quite revealing. Remember, government initially was not supposed to intrude into the business world and it had little effect as there were no taxes, and few regulations. Now, however, as government grows so too does the time in which we remain stuck in long-term pullbacks.

A Little Side Note

You might also notice that it was 76 years from the start of the mid 1800's depression ('53) to the start of the nineteenth century depression ('29) and from'29 - 2005 is also 76 years.

Markets Always Move Up!

It is true that the market and life in general is always moving forward, always progressing in an up / down fashion. So, we do always have something better to look forward to - that all corrections will eventually develop back into an up move and continued growth!

In the Meantime Buy and Hold Will be Dead and Buried - Do The Math

Did you think the value of your 401K would be down 20-30% from what it was in 2007? Of course not! You "knew" that it would just keep on growing until your account surges just like that of your parents or grandparents didn't you?

Now that it has moved down (in the Fall of 2009) and up in what your financial advisor has convinced you of - this is a correction and the normal way markets grow by moving up and down. Now you feel better because it's only 20-30% of what it was in 2007 having moved up from the lows of March 2009!

How Long?

Wonderful, buy and hold works just fine! Well, yes, if this were the end of the story. The problem is that this is the beginning of the story! That's right, if history serves us correctly, we haven't seen anything yet compared to what is to come. This next move down will not only be lengthy in terms of depth but will at times move very fast! If you think October 2007 - March 2009 was anything to behold as you watched the value of your portfolio steadily decrease, then just wait until the next move is complete.

And, yes, there will be a move back up at that time! Maybe it will get close to the first move down (about 6500 in the Dow) but beware, history tells us that there is always one more move down after and below the third wave.

Think ahead for a moment, it is now 2020 - 20 years after it all really began and if government has kept its hands out of it maybe that fifth wave will be complete. Frankly, I don't know of one person who for one minute believes the government will be less involved! Do you?

Yes, what we now call the "Great Depression" lasted 20 years when government was much, much smaller. Now 80 years later government is much more obese than it was back then and 20 years may only see the beginning of the final move down. How old will you be in 20 -30 years and how much do you project your buy and hold strategy will purchase for you then?

Nobody Knows

Nobody knows what will happen or when do they? No, not precisely, however, if we study our history we can learn as individuals (not though, as a nation). If you are one of the few who learn from history you should be able to keep the dollars you have today so you will be prepared to buy at the bottom rather than let it dwindle away in hope through the mindless, simple, buy and hold strategy that just happened to work for our parents.

Dow 10,000! Startling Fact?

According to Jim Bianco (9/14/2009) (BiancoResearch.com), the financial media was pretty worked up about DJIA 10,000. The index first pushed above 10,000 on March 29, 1999, 10½ years ago. Jim notes that since then, it closed above the 10,000 level 1,859 times. If one had put their money in a short-term Treasury bill the first time the Dow pushed above 10,000 and simply rolled over the proceeds of the bill at each maturity (and the interest), one would have a better return on their investment today, without any market risk.

If safety is your concern until the bottom of the bear, several years forward, the above statistic by Bianco Research may be worth contemplating.

Article Source: ABC Article Directory

About The Author: Jack Funderburk left the offline world of financial advisory in early 2008. By using Elliott Wave analysis he moved his clients out of equities in early 2007. Now, Jack serves new online entrepreneurs seeking to start and build online businesses. Check out his site and download his book for free, Building a Purposeful Business here: Building-Businesses-Online.com