When “Buy and Hold” Doesn’t Work

“Market returns are much more volatile than most people realize, even over periods as long as 20 years.”
That’s what investment manager Ed Easterling of Crestmount Research revealed in a recent New York Times article. This may alarm you, because it directly contradicts what we hear from most Wall Street “experts.”
It also echoes what I’ve been saying for years: the typical buy and hold method isn’t always a great investment. At times, it can be a terrible investment.
To prove this fact, Easterling produced one of the most interesting infographics I’ve seen about the benefits, or lack thereof, of long-term investing… a detailed chart of an investor’s average annual return dependent solely on when an investor first entered and exited the market. His calculation accounts for taxes and inflation – something you almost never hear about.
The illustration is based on the Standard and Poor’s 500-stock index for the U.S. and goes back to before the Great Depression.
Mr. Easterling was incited to create the chart after furiously debating with a client about whether investors should expect to achieve long-term average returns in the future.
Polls by three major research organizations – the University of Michigan’s Survey Research Center, as well as UBS and Gallup – all found that investors are strikingly bullish. Most individual investor predicted that the stock market would return about 10 percent a year over the next 10 to 20 years — or about 7 percent after inflation.
But research tells us historical averages can vary greatly depending upon when an investor is in the market.
For instance, the New York Times article notes that “After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.”
Mr. Easterling felt that choosing a single date was arbitrary which is why he created a compelling infographic to visually present the data. His detailed chart shows annualized returns in the S&P 500 based on thousands of possible combinations of market entry and exit (click here to view the infographic).
After looking at his chart, it’s clear that stocks have underperformed for long periods of time. In fact, wealth creation is directly tied to the time in which you were invested.
So, is Mr. Easterling’s chart the beginning of the end for the financial industry? Not by a long shot.
Investors are at mercy of the market gods when it comes to long-term investing, but that doesn’t mean that we should avoid investing all together.
There are many ways to combat the unpredictable fate of investment returns. My favorite way is through a conservative options investing strategy known as covered calls.
Today, you can boost the yields of the market’s safest, shareholder-friendly, blue-chip, dividend-paying stocks like Intel and Microsoft.
In fact, I will be discussing exactly how to generate this income in an upcoming webinar titled, “Covered Calls 101: With MSFT and INTC.”
In the presentation I will give you my step-by-step approach on how I increase my income on dividend stocks while simultaneously lowering my risk.
Let’s not fall prey to Mr. Easterling’s findings on long-term investing. Yes, Mr. Market will ultimately control our fate the returns of our holdings, but he left out the power of selling options to increase the returns of your overall portfolio.
I hope you won’t allow yourself the same fate.
If you would like to take a closer look at Mr. Easterling’s chart click here.