The revenge of “buy and hold”

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How well do you remember what happened in March, 2009?  That was the month that S&P finally stopped its historic downturn and slowly turned around.  While I don’t have exact numbers, my memory is that most news stories at the time were predicting a short upswing, then the dreaded “double dip” recession that would take stock prices down even lower.  More importantly, I don’t remember anyone saying this is the bottom and will get back to our highs in just 2 or 3 years.  Yet, this is what is happening.  For investors who panicked at the time and sold their stocks or equity mutual funds, they ended up making the classic investing mistake of buying high and selling low.

February 16 marked the official day that the S&P 500 doubled since hitting its low in March of 2009.  In just under 2 years, the S&P 500 not only doubled, it is now just 11% away from its all time high.  Why are these two concepts important?  Because it shows the value of not panicking during down turns in the stock market and the folly of trying to call market tops and bottoms.

Those investors who ran into the “safer” Vanguard Total Bond Market index in March, 2009 would have seen there investment go up by 4.3% in total over the same period, plus received interest (dividend) payments that equal about a 4% yield every month.  The problem is had those same investors stayed the course with their original strategy, they would have recovered a vast majority of their money.  Instead, their portfolio is still down more than 25% from the market high.

The lesson is clear – determine your investing strategy when the waters are calm and don’t jump ship when the waters get rough.  Finding the right balance of stocks and bonds that will help you meet your goals is only part of the picture.  Just as important is finding the right mix that will help you keep a cool head when everyone else is running for the exits.

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