Buy and Hold has RARELY Worked Historically
We all know that investing in the stock market has not exactly been a winning proposition since 2000 where real dividend re-invested return (adjusted for inflation) for the S&P500 has been -3.4% annualized (thru the end of 2009) or a total real decrease in the purchasing power of a hypothetical portfolio invested in the S&P500 of 29%. But even if we assume a longer-term investment horizon, the story from the last 140 years is not pretty as shown in Figure 1 below which charts the 30 year annualized returns for the inflation-adjusted dividend-reinvested S&P Composite index which does not account for any investment fees. Only in 27% of the last 120 years did the long-term real-returns from US equities go over 5%.
Figure 1
Traditional investment strategies and conventional wisdom promoted by Wall Street and embraced by most of the financial establishment (including possibly your very own financial adviser or planner) have ignored this reality and have foisted the idea upon us that 10% pre-inflation returns are obtainable from the stock market in the “long-term”, no matter what environment we begin investing in if we simply 1) Invest in a diversified portfolio of equities, bonds, commodities, real estate, etc. and 2) Hold-on through thick and thin for the long-haul with the quarterly or annual rebalancing. Let us test this idea using the above chart. The long-term rate of inflation which “everyone” knows is 4%, which means the claimed long-term real rate of return available from US equities is 6% if one re-invests dividends, right?
The red-dashed line in the chart above is drawn at the 6% level. The 30 year real annualized dividend reinvested returns for the S&P Composite index rise above 6% in only 14% of the 120 years from 1901 to 2010. We are coming off brief 13 year period in which long-term investors have succeeded in garnering a >6% return but that is the exception rather than the norm historically. In fact, the average 30 Year US Equity market real dividend-reinvested returns for investors who retired between 1901 and 2010 was 3.6% on an annualized basis.
