Buy-and-Hold as a strategy has no risk management built into it. You buy, and then you hope for the best. If the markets start dropping, you keep holding, hoping that the market will eventually recover, hopefully sooner rather than later. In fact you are encouraged by your Financial Advisor, if you have one, to keep holding no matter what the draw-down (a technical term for the peak-to-trough drop in the value of your portfolio). Using the same Real Dividend reinvested S&P Composite data we have been using, Figure 4 shows the Drawdown reached subsequent to each preceding portfolio peak. This is the “heartache” or “lurching stomach” factor which your financial advisors may not have prepared you adequately for when they try to sell you their services. Are you prepared to grit your way through a 50% drawdown that the markets deal you with? What if you plan to retire in 10 years … or 5?
Figure 4
Another way to look at this is to compare a Buy-and-Hold strategy with other investments or strategies in terms of the risk-to-reward. Figure 1 (shown again below) in the light red shaded area shows the risk-spread for investing in equities, i.e. the amount of excess 30-Year real return available from investing in the US stock market compared to the 30 Year real return from holding the 1-Year T-Bills. The average 30 Year Real return for our Long-term stock market investor for the last 110 years has been 3.6%, only 1.62% higher than the 30 Year Real return for our Long-term 1 Year T-Bill investor. Our stock market investor had to risk about 2 dollars for each dollar of gain, to get a 1.62% higher yield than the almost no-risk T-Bills. And our hypothetical retirees obtained a risk-spread > 4% for investing in equities relative to the 1-Year T-Bill in only 14% of the years since 1901. Is the possible gain worth the pain?
Figure 1
