Buy and Hold is a Matter of Luck

Markets are cyclical and have historically alternated between secular (long-term) bull and bear markets as is shown in Figure 2 below.  Actually secular bear markets have lasted for at least 15 years (to 19 years) whereas the two secular bull markets in the early 20^th century were 9 years long and the two since 1948 have been 18 years long each.  Since 1880, Secular Bull markets have roughly been in force 41% of the time while Secular Bear markets have been in force for 59% of the time.  Stocks have grown (in real terms) at a 12.8% annual rate during the secular bull markets since 1900 but have lost investors -3% annually (in real terms) in the secular bear markets in the same period.  Average real loss during any of these secular bear markets over the 15 to 19 year period was 42%.

 

Figure 2

Figure 3 below dramatically illustrates the cyclical nature of the long-term returns available from buying and holding the market.  We will somewhat arbitrarily call a long-term real return above 4% as being “good” and below 4% as being “poor”.  The green shaded regions are the “good” years to retire in and the red shaded regions are the “poor” years to retire in.   These green and red shaded areas correspond to secular bull and bear markets respectively shown in Figure 2 (except being shifted forward by a few years as one would expect since we are looking back 10 yr to 30 yr to calculate returns).  So whether a long-term investor’s net return, after adjusting for inflation, was positive or negative, was mostly a matter of when he started and when he stopped investing, i.e. whether he was born at the right time and/or retired at the right time or even made his investable money at the right times.  Most people today are rapidly falling into the “unlucky” category.  If these cycles continue to hold, we should see a further deterioration in long-term returns in the 2^nd decade of the 21^st century as the cyclical pattern indicates.  Looks like a bad decade or more to retire in for committed Buy-and-Holders, which a significant part of the population will be.

 

 Figure 3