Can you really
"Just buy and hold"?
One of the most common pieces of investing advice people will get is “Buy and hold the S&P 500”.
“It historically has gone up over time”
“It does 8% per year after inflation”
“It’s a great way to save for retirement”
Each of these are historically accurate statements.
But do you realize how terrifying this is to actually do?
Picture this:
You’re a college grad fresh out of school in May of 1999.
In August, you get your job’s signing bonus of $5,000 and decide to put it into an S&P 500 index fund.
“Alrighty, 8% annual growth here I come!”
For 2.5 years straight, the S&P drops.
By September of 2002, the market is down 50% from your first investment.
Okay rough start, but you keep regularly investing.
The economy turns around and by 2007 you are feeling great.
Then, the housing bubble bursts. The S&P 500 drops 53% in just over a year.
For the second time in 8 years, investing has burned you.
Here is a chart of what your first 8 years of “8% average returns” has looked like:
Sit with that for a minute.
- You graduate college and start investing
- You lose money for 2.5 years straight
- You rebuild for a few years
- Your net worth gets wiped-out again by ~50% around your 30th birthday
If YOUR first 8 years looked like that, how confident would you be in “just buying and holding the S&P 500”?
Most of you reading this started your career after 2011.
Adjusted for inflation, the S&P has tripled since 2011.
OF COURSE buying and holding sounds obvious to you.
But if history is a guide, we can be confident this run will not last forever.
What happens when the run ends?
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Photos from 2007-2009 Financial Crisis |
When the run ends, you will watch tens if not hundreds of thousands of dollars disappear from your portfolio.
Think about that.
You will watch tens if not hundreds of thousands of dollars disappear from your portfolio.
Will you be thinking of “8% average returns”?
Probably not.
You will be thinking "I need to stop this pain" and will want to sell.
Unfortunately, history shows us selling hurts your returns over time since you likely miss the initial recovery upswing.
Even our 1999 graduate has ended up making great returns over the last 25 years.
And that's what makes this scary.
To truly "buy and hold", you have to stay calm when the headlines are bleak.
You have to continue to buy when the market is tanking.
You have to hold when all of the experts are saying "this time, it's different".
That is hard.
I like to think I'll have the discipline to not panic in the short-term.
I can't say I'm looking forward to finding out.
"Buy and Hold Low-Cost Index Funds like the S&P 500" is likely still among the best financial advice for young people.
It's simple, straightforward advice.
But don't let anyone tell you it's easy.
