I read an article in Sunday’s Washington Post by James Glassman who back in 1999 predicted the Dow would easily get to 36,000 in a few years. Of course, he couldn’t have been more wrong, so when I see an article by someone like him, I take it with a grain of salt. However, it was more the title of his article, “The Modern Investor” that caught my attention, and the subject matter; that Buy and Hold as we once knew it is dead and gone.
In this case, we have a writer who was convinced not that long ago that Buy and Hold was the only way to go; buy a block of stocks and don’t even bother looking at for many years; that history proved this was a smart strategy. And, there was some basis for following that investment model, but we’ve seen how difficult that has been the past decade plus.
For example, in April 2000, the S&P was at 1527. Today the S&P is at 1300. So, if you had bought an S&P index fund, you would have lost roughly 15% over the past 11 years. Ouch. Toss in a factor for inflation and the time value of money, and if you thought you might retire in the year 2011 based upon a 10 year projection of historical returns over that period of time, well, you’re probably not retiring.
The problem I’m having with Glassman’s article is that while he’s changed his allocation percentages – i.e., moving away from heavy into stocks by balancing with bonds – he’s still stuck on the long term concept. So, while he’s recognized that having 90% of your portfolio in stocks for a long period of time doesn’t cut it anymore, there’s not enough recognition that you’ve got to be swift and nimble these days just in case things turn south in a hurry.
In the case of the his bond allocation at 50% of a portfolio, you would have been deeply under water if you had started this strategy not that long ago when 10 year treasury yields were down around 2.4%. They recently moved close to 4%, so you would be stuck holding to maturity unless you needed to exit prematurely for some reason. He espouses a Buy and Hold on the bond portion of the portfolio – i.e., don’t try to trade and make money on shifts in interest rates – and to consider corporate bonds as part of the portfolio. But missing from his equation is what happens if you need to get liquid in a hurry; lost your job, ran out of emergency savings, etc.
To his credit, I do believe Glassman now realizes that there are many variables that can affect one’s portfolio; world events, market crashes, speed of execution, changes in technology. But, he’s still hanging on to the notion of Buy and Hold, even though he admits that’s harder to follow these days. I would have been more impressed if he recognized and talked about how many professional hedge funds these days employ minute by minute strategies let alone the years he is still talking about to try to achieve decent returns. Maybe the modern strategies won’t prove to be as effective after all, but simply shifting the allocation of a portfolio while holding on through thick and thin just doesn’t cut it anymore.