With few exceptions, the financial community practices “Buy And Hold” investing. In short, Buy And Hold investing is based on the belief that while the market will go up and down in the short term, over the long term — five years or more — it will rise at a relatively predictable rate. So in periods of economic upheaval, investors are told to be patient and wait out the storm, and not “panic” and rearrange their portfolios.
This confidence in an ever-rising market forms the foundation of the mainstream approach to portfolio construction. Investors are taught to decide how much risk they’re willing to take — greater risk offers higher potential returns, but also an increased chance of losing your money if things go wrong. Once investors settle on the level of risk they’re comfortable with and what time frame they have, they’ll then know how best to divide their investments. For example, if they need their money in four years and would rather have lower but more reliable returns, they might go with a conservative portfolio made up of 70% bonds and only 30% stocks.
According to Buy And Hold investing, each time frame and level of risk has its own ideal asset ratio. And because Buy And Holders believe the market grows at reliable, historical rates, investors can depend on receiving the returns they were promised when they first created their portfolios.
Unfortunately, things haven’t worked out that way.
If you had entrusted your nest egg to the S&P 500 on January 1, 2000, expecting a historical annual return of 11%, you’d be in for an unhappy surprise: By December 31, 2010, your investment would have grown a paltry 4.25% in total returns, 0.38% per annum, which includes reinvested dividends. Once you calculate in 3% inflation per annum, you would have actually lost ground. That’s no way to save for the future.