Buy & Hold?

With the recent declines - and especially if we see them continue - the advocates of “buy and hold” will soon be telling us “Stay invested” and “Don’t miss out on the  best days of the recovery by selling your equities “

Now I think buying investments and holding them for a long time is a great idea, however I don’t feel that you can just decide to buy at any point and be assured of the average return. I read an article recently providing facts and figures on how 3 month falls were typically followed by strong rebounds in price (often over 20%) and that missing the best 10 days of the market reduces returns by up to two thirds.

This may well be the case if you are in it from the very start but try telling it to some one who invested at the market top in 1999 or 2007 and have only recently broken even on that investment 15 or 7 years   later respectively.  No doubt returns are reduced by missing some of the best days but what if you were prudent and missed some of the worst? Capital preservation stops you taking on too much risk to try and recover your losses, here’s the maths -

· £100 invested  and lose 30% you have £70, a return of 43% (£30/£70) gets you back to £100

· £100  invested and lose 15% you have £85, the same 43% return gets you to  £121 a gain of 21%

Out of interest  we looked at the 1999 FTSE 100 top and there were two declines in 1998 and 1999 where 10% or more was lost and  the market  recovered  those losses and made gains— but the lost over 50% over the next three years! 

Look back further and in 1929/30 the US Dow Jones Industrial fell over 40% then recovered rising over 47% from that low (still over 50% what it was originally worth!) before falling again 85%. We can never say with any certainty what is going to happen but always have a look at history and consider where you are in relation to the average—buy and hold is a great strategy but only if you decide to use it at the right time.