Death of the 'buy-and-hold' strategy has been greatly exaggerated
The 1990s proved such a golden decade for equity investors. The prevailing wisdom was that any portfolio should be full of equities and those equities should be held for the long-term. However, as we reached the Noughties, the so-called ‘lost decade’ for equities, investors have lacked the courage to buy stocks for the long run…
The 1990s proved such a golden decade for equity investors that, as the new millennium began, people were giving up their jobs to become day-traders and the prevailing wisdom was that any portfolio should be full of equities and those equities should be held for the long term.
12 years on and the picture is rather different as headlines mourn the twin deaths of equities and the ‘buy-and-hold’ strategy. The so-called ‘lost decade’ has led investors to shut up shop and truncate their timeliness. This refusal to buy stocks for the long run has in turn brought such economic volatility that the market moves daily on daily news flow – even though most of that is nothing but ‘noise’.
New data from the US should therefore offer pause for thought. According to investment firm Richard Bernstein advisors, the probability of making a loss on an investment in the S&P 500 if you hold it for one day is 47%. That drops to 44% if the holding period moves up to one week, to 42% for one month, to 39% for three months, 33% for one year; 23% for three years and 11% for 10 years.
So people may say buy-and-hold is dead, but in fact this approach is your best chance of not been led astray by short-term data. Economies change slowly over time rather than day by day so looking to position your portfolio on a daily basis is asking for trouble.
Many people have looked at the ‘lost decade’ and, as many people are prone to do, they have learned the wrong lessons. They saw equity markets performing poorly over 10 years and concluded equities were dead and holding stocks for longer time periods was a mistake. The right lessons, however, were the long time horizon was fine and equities fared badly from 2000 because they were overvalued.
That means people are once more making the same mistake – buying into sectors and stocks, such as emerging markets and consumer goods companies that have performed well over the last decade and, as a consequence, stand on overly high valuations. As a strategy, buying the previous decade’s winners did not work so well in the last decade and it will not in this one either.
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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