At yesterday's Power Lunch town hall (links to video highlights are below), there was some good debate on whether buy and hold pays off in the long run. During one segment, Dennis Kneale went back in time to show that while the market is down in the short term, the S&P 500 Total Return has yielded a compound annual return of over 8% per year since 1988. Others argued that even with a long term horizon, there are plays you can make to help you outperform, especially in these volatile times.
Here are some of the analyses that fueled the discussion:
1) Short vs. Long Term Trends: Over the past decade we have seen some significant swings in the markets with no more than five years between peaks and troughs but over the long run, the trend has been fairly steady.
First the shorter term results...
- The S&P 500 Total Return index (accounts for price appreciation and dividends) peaked at 2447.03 on October 9, 2007. Since then, it is down 45%.
- From its peak to its trough of 1206.04 on 11/20/2008, it fell at a Compound Annual Growth Rate (CAGR) of -47.0%.
- $100 invested on 10/9/07 was worth $49.29 on 11/20/2008
- Conversely, from its trough of 1108.91 on 10/9/2002 to its peak of 2447.03 on 10/9/2007 the S&P Total Return gained a total of 121%
- CAGR of +17.2% (CAGR of +1.4% from 2002 trough to 2008 trough)
- $100 invested on 10/9/02 was worth $220.67 on 10/9/2007
- From its peak of 2107.28 on 3/24/2000 to its trough of 1108.91 on 10/9/2002 the S&P Total Return lost 47%
- CAGR of -22.3.0% (CAGR of -6.2% from 2000 peak to 2008 trough)
- $100 invested on 3/24/00 was worth $52.62 on 10/9/2002
Now look at the long term (see chart below). Extending the trend line from its divergence point in 1995, you can see that while we have fallen significantly from the highs of late 2007, we are exactly on trend. Many technicians will tell you that a buying opportunity occurs when a security dips to its trend line and bounces back up. Unfortunately, that does not mean that a person who is nearing retirement has the luxury of recouping the significant losses he or she may have just experienced, but if you are further away from retirement, it could be the time to start getting your feet wet. Since 1995, the CAGR for the S&P Total Return Index is over 6%; since 1988, it is over 8%.