Long-term investing pays off

What does it mean, in today’s world, to invest long-term, that is to buy and hold funds or managers for years? The question is a serious one in that investment performance is measured over very short periods and then comparisons are made. Such analysis fails to account for whether a strategy has had time to realize its goals, let alone whether competing strategies have had a chance as well.

The short-term rating of investments has two serious problems: it forces many managers to push for short-term results, often leading them to drift from their announced strategy (or turn over their portfolios each year, which increases transaction costs and taxes due), and it leaves investors looking for results too soon, so that they may end up selling what may be a great long-term investment because a competitor looks better in the short run.

How do you guard against this? First, understand that the volatility you see in the short term dampens down over time. That is, swings in the stock market could be plus or minus 30% in a year but come down to plus or minus say 5% for a 5 year annualized return. Second, realize that you are giving your strategy a fair chance by waiting, rather than panicking or responding on impulse. Third, realize that the real way to ultimately achieve good returns from the market is by waiting. The uncertainty built into the market means that it rewards those who can wait, and they are the ones with lower trading costs and less taxes due.

How do you find managers to help you invest this way? Look for those with low turnover of key people, who invest in their own funds, and who have the conviction to stick to their strategy even when it is out of favor. They often buy a stock that continues to go down in price before it ultimately turns up, over time.

So be a contrarian, invest for the long term!

Let us know if you have questions or comments. Thanks,


Sticking to your asset allocation strategy works over time

The article below sites examples of how the advice we gave last fall of holding has paid off.

The article also notes that “buy and hold” is short hand for

“a ‘strategic policy with rebalancing.’ As Paul [Kaplan of MorningStar] points out, buy-and-hold benefits greatly from rebalancing. And, of course, while the rebalancing would have been no fun at all during 2008, it would have maintained a healthy allocation in the REITs, small-value stocks, and other such fare that have rebounded so strongly over the past six months.”

So, now in hindsight, we have proof that the recommendations last fall were well founded

Let me know if you have questions on rebalancing now or any other matters.



Posted: by John Rekenthaler | Bio

09-10-09 | 7:31am

In Praise of Buy-and-Hold

If there was one abiding lesson to come from 2008, it was that buy-and-hold strategies based on long-term strategic allocations had failed. They were the product of a bull-market mindset. Rather than a static policy, investors need a flexible investment approach that recognizes current market and economic conditions, and which responds accordingly.

Or so I have been told, at conferences, and on television, and in Internet articles, and pretty much everywhere, as far as I can tell. Morningstar’s own Investment Conference this past May had not one but two panels that poked at the conventional wisdom.
How does this work in practice, though? It doesn’t, I would submit. Morningstar’s Dan Culloton recently noted the following figures: Vanguard REIT Index Fund, up 82% since March 9; Vanguard Small Cap Value Index, up 75%; and Vanguard Small Cap Index, up 70%.

Wonderful stuff. The sudden surge that occurs only once every several years, at very best–the rare payoff that accrues to those who have the courage to own risky assets.

But let’s say you had followed a flexible investment policy, and cleared your house at some time in 2008 of these illiquid, value-oriented securities, which you correctly surmised would be dragged far, far down during the recession.
I’m saying right here, right now, had you sold those securities in the name of flexibility, you never would have gotten back in them to enjoy their gains.

I remember early March 2009. I was at an institutional investment conference, with stocks dropping daily, the knowledge that bottom-fishing over the previous 18 months had meant nothing but disaster, relentlessly bad economic news, and a series of depressing presentations from Wall Street’s top economists showing absolutely no turnaround in sight. Who was buying?
Well, somebody was, of course, as those stocks stopped falling as of March 9 and started to rise. However, I strongly suspect that the actual buying power was quite modest, that the rally kicked off simply because the sellers were exhausted, and there was a bit of fresh money among those who had never left the market in the first place, to reverse direction. I highly doubt that the truly flexible investment managers decided right then and there, to get back into the market. In fact, I know they didn’t, because as a group the hedge-fund industry missed the March rally entirely.

This is how it always goes. In 1988, in 1991, in 2003, and now in 2009. It seems sound looking back to the previous year to acknowledge the failure of blind, dumb strategic policy, and to embrace common sense. But somehow common sense isn’t all that common when it comes to getting back into the stock market after the decline has occurred. It wasn’t in 1988 and 1989, when the heroes of the 1987 crash lagged dramatically; it wasn’t in the early 1990s; it wasn’t in the middle 2000s, and it won’t be over the next couple of years, either.

There is a time for flexibility. There is a time when we should listen to those who talk about the virtues of not being fully invested. Unfortunately, that time is not now. Not after the losses have been sustained. That time is when the DJIA is at record highs, when people are buzzing about what they saw on CNBC, when Morningstar.com’s boards are buzzing with speculative stock selections.
But who listens then?

To echo Mr. Churchill, buy-and-hold is undoubtedly the worst form of investing–except for the alternatives.*
*Paul Kaplan of Morningstar wishes to inform the audience that Rekenthaler’s term of “buy-and-hold” is a shorthand term for “strategic policy with rebalancing.” As Paul points out, buy-and-hold benefits greatly from rebalancing. And, of course, while the rebalancing would have been no fun at all during 2008, it would have maintained a healthy allocation in the REITs, small-value stocks, and other such fare that have rebounded so strongly over the past six months.

Duly noted.