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~Why Buy-and-Hold is, Generally Speaking, a Sound Strategy~

 

Many investors are tempted to try and time the buying and selling of their stocks.  Statistically speaking, this is generally a losing proposition for the average investor.  One of the problems is that we just don’t know what the future will bring; we only know what the past has brought.

 

Over the past couple of months, the stock market has taken off, with the S&P 500 approaching all-time highs, after reaching the depths of a 24% drawdown in September of 2022.

 

The recent spike in the stock market may have seemed improbable.  It certainly did to many economists who were predicting that the Federal Reserve’s rapid interest rate increases (to try to cool inflation) would push the economy into a recession, and, likely, the stock market further into decline.  That didn’t happen (at least in 2023!).  The problem that the average active investor faces in watching these events is that they tend to react emotionally to the news of the day.  When the stock market is down, investors are tempted to sell their investments as they fear that the market will fall further.  In fact, investors lost almost $180 billion in 2023 betting that stocks would keep falling (https://finance.yahoo.com/news/short-sellers-lost-close-to-178-billion-in-2023-152135596.html#:~:text=Short%20sellers%20on%20Wall%20Street,leader%20not%20atop%20the%20list).

 

The problem is that, according to Vanguard’s research, declines in the stock market tend to be followed by gains (https://advisors.vanguard.com/content/dam/fas/pdfs/FAEXPCCA.pdf).

 

For example, this graph from Vanguard’s research illustrates this well.

 

 

Take a look at the massive daily percentage fluctuations during the start of the covid crisis.  Though the stock market fell by over 20% during the pandemic, the daily swings were quite wild with steep declines often followed by steep increases.  Jumping out of the market risks missing those upward swings.

 

This is why it is generally best for the average investor to just stay invested, especially if you have a portfolio that is appropriate for you.