Make 2014 A Year for Buy and Hold Investing


For an investor who bought into the Straits Times Index (SGX: ^STI) back in 11 October 2007, when it closed at 3,876 points, buy and hold investing would likely look like a dead duck to him.

After all, we’re at the start of 2014 and the index is only at 3,180 points or thereabouts. So, that’s some six-plus years and counting, and the investor’s still down almost 18%.

But, speak to an investor who bought the index 11 years ago at the start of Jan 2003, and he would have been a happy man. The STI has grown by almost 140% since then, or slightly more than 8% a year.

So, on the one hand, I could look at results over the past 11 years and say that buy and hold investing works. On the other hand, I could point an accusatory finger at what has happened from 11 October 2007 onwards and say that, perhaps, buy and hold investing is past its prime.

If I had done the latter, however, I would have missed out on one very important point about the market: investing for the long-haul gives the best odds of success, but it doesn’t mean that an investment at one single point in time will always work.

Consider American billionaire investor Warren Buffett’s simple retirement advice (emphasis mine):

[If] you invested in a very low cost index fund – where you don’t put the money in at one time, but average in over 10 years – you’ll do better than 90% of people who start investing at the same time…

…Just pick a broad index like the S&P 500. Don’t put your money in all at once; do it over a period of time.”

The operative phrase here is “invest for the long-term, but do it over time”. While there is a tendency for stock markets around the world to move up in tandem with a country’s economic growth over the long-term, stocks are still prone to a cycle of booms and busts.

An investor caught investing in a narrow frame of time at the peak of a cycle might face years of losses. But, an investor investing through many years greatly increases his odds of investing at the trough of market crashes, thereby setting himself up for great returns going forward.

Of course, this naturally leads to the question: why can’t we time the market and invest only when the market’s bottomed out? That’s because most investors are just bad at timing the market, sometimes abysmally so.

For the 20 years ending on 2003, the S&P 500 index in the USA gained almost 13% a year. How did the average American equity fund investor fare? Three-and-a-half percent per year. That’s an annual return of 3.5% and also a real pity.

How did that happen? According to Dalbar, an organisation that provides investor-performance studies (and the organisation that provided the statistic regarding the equity fund investor returns mentioned above), it could be boiled down to how “investors are unsuccessful at timing the market.”

When faced with studies like these on the ineffectiveness of trying to time the market, investing over time and staying invested for the long-haul seems like a much more palatable choice.

Here’s an example: Since the start of 2003, a hypothetical portfolio made up of regular monthly investments into the Straits Times Index tracker, the SPDR Straits Times Index (SGX: ES3), have been shown to lead to annualised returns (without accounting for dividends) of 4% a year, the Great Financial Crisis of 2007-2009 notwithstanding. Factoring in dividends could reasonably bump up the annualised return to around 7%. Not too shabby, isn’t it?

Foolish Bottom Line

All told, investing for the long-term greatly increases one’s chances of success, even after taking into account how investing for the long-haul can be dangerous if done in a narrow span of time.

We’re at the start of a new year and it’s a great time to make some resolutions if you haven’t already done so. For investors, let’s make a resolution for this year – and beyond – to be one for buy and hold investing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.