“A buy & hold investment strategy is the worst type of investment strategy that you can use, except all of the others”
NICK MURRAY, Financial Writer and Columnist
By Richard L. Kesner, President
The CommonWealth Group
August 2007
Investors are looking to meet financial goals at some distant time in the future, while speculators are looking to out perform the market or index on a regular basis. The real problem is that out performance is not a financial goal, not does it assure the realization of individual financial goals. Investors with written plans meet their goals while people chasing performance do not meet their goals.
Over the past 20 years U.S. equity mutual funds have returned slightly less than 11% on an annualized basis. Equity mutual fund investors however, have earned less than 4% on their investments. The reason is mainly poor investor behavior and constantly chasing returns by moving to hot managers.
Nick Murray stated recently, “It is impossible to consistently outperform because timing and selection can neither be predicted nor controlled.” No one knows what is going to happen next, which sector will be in favor or what style will be in favor. We believe that rankings and ratings on various funds and managers based on past performance is worth the paper it is written on. The selection of managers must be determined by the investors overall goals and risk factors first and foremost. The success of the investment will be determined by how resolute the investor is to stick through the bad times as well as the good times.
The past two weeks have certainly tested investors resolve. As I write this, the Dow Jones Industrial Average has dropped 400 points. While the press seems to think this is an “end of the world scenario” we would like you to understand that markets, like many other things, do not only go up. I know this is a huge surprise to many of you, but it is reality.
I was born in 1945. If my parents had taken $1,000 at that time and invested that $1,000 in an S&P 500 index fund the account would be worth over $1,000,000 today. The compounded rate of return is about 7.68% and this does not include dividends. If we included dividends the compounded rate of return jumps to over 11% and the $1,000 original investment is worth over $5 million.
The above calculations assume a buy and hold strategy through some of the worst market corrections in history. I have listed below a history of some of the major market declines (minimum 19%) since 1945.
I think we can stop here because you get the point. Markets will always correct. Stay the course, don’t panic, have reasonable expectations, and you will meet your goals.
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