Hold on – and keep down the risk of losing out with equities
Is buying and holding equities as safe as it seems? That depends where you put your money, say experts
Traders in the New York Stock Exchange: The US was the big winner of the 20th century. Excluding the US, real global returns averaged just 4.4 per cent. photograph: reuters
Over the long run, equities have enjoyed handsome returns, but does it follow that “buy and hold” invariably delivers for investors? Is it the case that good investment is all about time in the market, rather than timing the market? What kind of long-term returns are realistic? And if markets go pear-shaped, how long might investors have to wait before they are back in the black?
The buy-and-hold camp point out the US stock market has returned average annual returns of more than 9 per cent (6.3 per cent in real terms, adjusting for inflation) since 1900.
In real terms, $1 invested in stocks in 1900 would have been worth $951.7 last year, compared to just $9.40 for bonds.
Sceptics, however, note the 21st century’s miserable returns. According to London Business School professor Elroy Dimson, co-author of the annual Global Investment Returns Yearbook , real global equity returns averaged just 0.1 per cent between 2000 and 2013.
Bad as returns have been, most market-timers habitually do worse. US fund outfit Vanguard recently noted its clients tended to buy high and sell low, recording annual gains of just 2.67 per cent over the past 15 years, compared to 4.58 per cent for the S&P500.
A US study of 66,000 investors between 1991 and 1997 found the most active traders earned 7 percentage points less annually than buy-and-hold investors.
Countless studies confirm the vast majority of fund managers also underperform the overall market, in both bull and bear climates.
“The risk of losses declines as investors extend their holding periods,” says fund giant Blackrock. Since 1890, investors suffered losses in 23 per cent of five-year periods and 14 per cent of 10-year periods. Equity investors enjoyed positive real returns “in almost any 20-year period”.
Nevertheless, long periods of stagnation are not uncommon. Between 1900 and 1920, the Dow Jones Industrial Average went absolutely nowhere. It went skyward in the 1920s before crashing in 1929. By 1948, it was still 50 per cent below that infamous peak and did not hit new highs until 1954 – a 25-year wait.
Another major bull market ensued, only for famine to strike again – at the end of 1981, the Dow was no higher than it had been in 1964. The index enjoyed an astonishing 15-fold increase between 1982 and 2000 to be followed by another lost decade.
“We had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points,” as Warren Buffett once put it. “And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points.”