Over the last few weeks, I have written several articles about asset allocation and how you can’t just buy and hold anymore. In fact, on Saturday April 4, I spoke at a conference in Orlando and the crux of my presentation was: why buy and hold isn’t the way to go anymore.
After my presentation, one of the attendees asked me why I felt buy and hold was dead. What has happened in the market that caused the long-held belief that buying and holding a stock or the market forever is not the way to invest?
Where do I start?
With the help of my colleague Christian Hill, we went back to 1950 and looked at the S&P 500 over the last six decades. Here are the returns per decade.
As I looked at these results, I started thinking about how different the market is now compared to the 1950s. How many people do you think were actively investing in the market in the ‘50s and ‘60s? Not too many I would guess. Maybe four or five million at best. People may have had money in pension plans and the like, but the funds were being managed by a professional investment manager.
In the ‘70s and ‘80s we saw tremendous growth in Individual Retirement Accounts and mutual funds. This made it easier for the average Joe to get involved in the market. In the ‘90s, we saw two things greatly impact investment growth- 401(k)s and the internet.
Look at how the ‘90s were the biggest growth decade for the S&P 500. Do you think that is a coincidence?
By 2005, there were 436,207 plans, 44.4 million participants and $2.4 trillion in assets in 401k plans. Do you think the growth in participants and growth in assets had anything to do with the tremendous growth in the market during the ‘90s? You bet it did.
Take a look at the 20-year periods.
Look at the tremendous growth in the last 20-year periods. I also decided to break it down into two periods, the first 30 years without 401(k) plans and the 20 years since 401(k) plans were introduced. From 1955-1985, the S&P went up 350%. This is an impressive number, but from 1985-2005, the S&P jumped 632%.
The second thing that happened in the ‘90s was the onslaught of the internet and internet brokerage firms. Instead of having to have an account with Merrill Lynch, Shearson or Paine Webber, individual investors could open an account with any number of online brokerages and pay one-tenth the commissions charged by the mainstream brokers.
I am not saying whether I think 401(k)s and online brokerage firms have been good for the overall market. But what I do know is that these two creations have had a profound impact on how you have to view the market.
They have created easier access to the market and created more involvement from more people. Unfortunately, they did not come with more education about the markets. This is why I think traditional views on investing have been changed forever.
God help us if the plan to allow self-directed Social Security ever comes to fruition.
Good luck and good trading,
Rick
