Thursday, August 25, 2011

Buy and Hold (and Buy Some More) is King in Crisis.

Ever since the crash of 2008 we've heard stories of investors withdrawing all of their money from stocks and putting it in ultra safe investments like cash and treasuries. We've also heard numerous proclamations that "buy and hold is dead". Here's a story that shows buy and hold is not only not dead, but by far the best course of action for your retirement planning...

First, the disclaimer and caveat: Staying the course/buy and hold and buy some more is the preferred course of action with proper diversification and time to recover from the volatility. In other words, don't just sit there if you're 5 years from retirement and 90% in stocks. But then again, if that's your 401(k) at that point in your life, then you've got serious problems anyway. See a professional retirement planner ASAP!

Now for the rest of the 401(k) population, US NEWS & World Report has a piece detailing how 401(k) Savers Who Stuck With Stocks Saw Gains

I've gone the extra mile to compile the data presented in that article into a chart to really hammer home the contrast.

Click for larger view.

The study (by Fidelity investments) compared the average return of 401(k) accounts from September 2008 to June 2011 across 5 possible actions taken after the big plunge of 2008:

  1. Do nothing. (stay the course)
  2. Pull everything out of stocks and put it all in a "safe" investment, like cash
  3. Pull everything out of stocks, and then pile back in once the market began its bull run
  4. Left everything as it was, and stopped contributing new money
  5. Left everything as it was and increased contributions

As you can see, the winner by far is not only holding onto your stocks, but adding to them on the way down. This is because you're essentially buying those new shares on sale and magnifying your gains when the market swings up again.

Note: leaving the market and getting back in is nearly the same as staying and not buying new shares. This makes sense since you're essentially riding the market down and then back up and most people cannot time the optimal time to get out and back in.

Incidentally, these results mirror my own experience. During the crash I left my allocations untouched, and increased my contributions by 5%. The result was that my overall account balance had recovered within a year of the market crash.


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