When things get dicey, it's natural for investors to feel scared and want to sell stocks that are falling. But remember what history (and Warren Buffet) has taught us.
Last weekend, I nearly died in a fiery wreck.
That’s because while listening to a financial radio program in my car, after hearing the host’s ridiculous comments, I nearly drove off the road, yelling like a lunatic at the radio and a host who couldn’t hear me.
The specific words that nearly caused my early demise? “Buy and hold, those days are over.”
In other words, this time it’s different.
That kind of advice destroys nest eggs.
When things get dicey, it’s natural for investors to feel scared and want to sell stocks that are falling. But history shows us that’s usually the worst time to sell.
Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.”
Bought at the top? You still made money
If you entered the market at the high on Oct. 11, 2007, before stocks tanked during the Great Recession, you’d be sitting on gains today of 11%, not including dividends.
I know that’s not a huge number over six years. But considering that since 2007, we’ve endured near financial Armageddon due to the mortgage crisis, a crippling recession, collapse of housing prices, several European crises, various foreign conflicts, federal budget sequestration, a government shutdown and being hours away from defaulting on the safest investment in the world — up 11% is pretty good.
In fact, I bet if on Oct. 11, 2007, I told you all those things would happen in the next six years, but your 401(k) would be worth more than it is today, you’d take that deal, whatever the number.
Besides, do you really think the financial advisor I heard on the radio would have done better for you than if you had invested in a diversified portfolio and left it alone?
Over 10 years, only 24% of active mutual funds beat the market. Active mutual funds are funds in which managers buy and sell stocks they believe will outperform or underperform. These are professional analysts who spend all day studying the market.
And if you’re in passive index mutual funds, you don’t need to pay an advisor 1% of your assets every year for that. If you do, you are guaranteed to underperform the market because the index funds should come close to equaling the market’s return. So if you’re getting market returns minus 1% in fees, you will underperform by 1% every year.
How many people listened to an advisor because things were different this time and dumped stocks in 2008 and 2009 as the economy turned sour? There was every reason in the world to do so. Major banks were failing and in less than 18 months, the S&P 500 was cut in half. Retirement accounts were decimated.
In March 2009, at the market bottom, the headlines in the media featured sunny stories such as “World Bank Predicts First Global Recession Since WWII,” and “U.S. Unemployment Jumps to 8.1%.”
It was tough to buy stocks or even hold them as the financial world was collapsing around us. But investors who remembered that it’s not different this time were able to ride out the storm and see stocks rise 162% from the lows.
If that’s not enough for you, how about Warren Buffett? He’s earning a 50% yield on his original investment in Coca-Cola (NYSE: KO). In other words, he makes his entire investment back every two years.
If you invested $10,000 25 years ago, around the time that Buffett did, today your stock would be worth more than $140,000. And you’d have collected more than $41,000 in dividends. If you had reinvested the dividends, it would be worth more than $230,000.
Boring Procter & Gamble (NYSE: PG) had even better returns during that period — $10,000 invested became over $146,000. Plus, more than $46,000 in dividends would have been paid. With dividends reinvested, it would have turned into nearly $258,000.
And mutual fund T. Rowe Price Group (Nasdaq: TROW) likely made a heck of a lot more money for its shareholders than it did for its clients.
An investor who put $10,000 into T. Rowe Price stock instead of one of its mutual funds is now sitting on more than $713,000. That investor would have collected more than $110,000 — or more than 11 times his original investment — in dividends. If he’d reinvested the dividend, the nest egg would have ballooned to more than $1.1 million.
So are you going to follow investors like Buffett and learn from market history, or are you going to listen to some schmuck on the radio who is trying to scare you into turning over your assets to him so he can take a percentage of it every year?
Certainly, you can’t buy and blindly hold forever. You need to pay attention to your portfolio. But to suggest that buy and hold doesn’t work anymore is either misleading or ignorant.
Marc Lichtenfeld is a senior analyst at Investment U. See more articles by Marc here.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.