As the U.S. stock market continues to set all-time highs, many investors are proudly adhering to their mantra of “buy and hold.” That is what financial advisers preach, and investors are sticking to it.
For now, anyway. The tougher question is this: Will they stick to buy and hold if the market tumbles? If experience is a guide, the answer for almost all of them will be “no.” And that means, once again, they will fall into the classic trap of buying high and selling low.
Do you have what it takes to stick to a buy-and-hold strategy through a perilous market?
The trap snares them in several ways. Some who now think of themselves as buy-and-hold investors will be quick to throw in the towel at the first sign the market might be entering a correction. These investors then tend to sit on the sidelines too long and don’t reinvest until prices are relatively high again.
Others, perhaps most, wait until it’s clear that a bear market is well under way before giving up on buying and holding and becoming a market timer.
Regardless, one consequence is that market timing becomes progressively more popular the further the market falls. That is because almost all attempts at market timing during bear markets will improve performance compared with buying and holding, since any retreat to cash—even if chosen randomly—will tend to do better than remaining fully invested. Thus, as the bear market leads to bigger and bigger losses, and a bottom nears, erstwhile believers in buying and holding start genuflecting at the altar of market timing.
Consider the several hundred stock-market timers tracked by the Hulbert Financial Digest during the 2007-09 bear market: No less than 94% outperformed a buy-and-hold strategy. (See accompanying chart.) Not surprisingly, believers in buying and holding were scarcely seen in March 2009, at the bear-market bottom.
Conversely, market timing becomes progressively unpopular during bull markets. That is because, during multiyear uptrends, buying and holding will inevitably beat almost all attempts to time the market. One by one, previous believers in market timing recant and declare themselves latter-day converts to the buy-and-hold religion.
Since the March 2009 bear-market bottom, 98% of market timers monitored by Hulbert Financial Digest have lagged behind a buy-and-hold strategy. No wonder market timing isn’t very popular these days.
Early warning signs
An implication of this cycle is that market timing’s popularity will hit bottom just as the stock market hits its top. James Stack, editor of the InvesTech Research investment advisory newsletter, is detecting early warning signs of exactly that, arguing that market timing is about as unpopular today as he’s ever seen. He says current attitudes are reminiscent of the mood in the months leading up to the bull-market tops of early 2000 and autumn 2007.
Mr. Stack hastens to add that he’s not yet ready to declare the bull market to be over. But he recently reminded clients, “Excitement is highest as the roller coaster goes over the top.”
Note carefully that these popularity swings have nothing to do with whether market timing has become a better or worse strategy over the long term. Virtually all studies have found that the vast majority of market timers lag behind a buy-and-hold strategy over periods encompassing one or more full market cycles. From a purely statistical point of view, of course, those studies’ conclusions are equally compelling regardless of whether we’re at the bottom of the bear market or at the top of a bull market.
But investors are emotional beings rather than statistically motivated automatons. And the recent past plays a huge role in their attitudes. At the bottom of bear markets, when by definition doom and gloom is the most widespread, it takes rare courage and discipline to remain a believer in buying and holding for the long term.
If you nevertheless do throw in the towel at the bottom of a bear market, you almost certainly won’t even tiptoe back into equities until the market has staged a rally that is powerful enough to convince you that it is more than just a dead-cat bounce. That in turn means you will have suffered through all or nearly all of the bear market’s losses and enjoyed only a fraction of the bull market’s subsequent gains. That is one reason most market timers end up lagging behind the market over time, even for those who successfully sidestep some of the bear market.
Buying-and-holding test
It is important to understand this if you are to have any hope of avoiding a similar fate. Now is the time to engage in honest soul-searching about your commitment to buying and holding. If you don’t really have what it takes to stick to that strategy through a bear market, you should reduce your equity exposure to a level you would be willing to stick with through a major decline.
How big of a decline? During the 2000-02 bear market, the S&P 500 fell 49.1%. This benchmark did even worse in the 2007-09 bear market, falling 56.8%. There is no shame in admitting that you don’t have the intestinal fortitude to stay fully invested through declines of this magnitude. Most who claim they do have what it takes are kidding themselves.
If you do decide to reduce your equity exposure now, where should you invest the proceeds? Bonds are one obvious alternative, though they carry their own risks since interest rates are trending upward. One way to minimize that risk is by keeping maturities short. One low-cost possibility is Vanguard Short-Term Bond ETF (BSV), which owns bonds with an average maturity of 2.9 years. Its current yield is 1.7%, and it has an annual expense ratio of just 0.07%, or $7 per $10,000 invested.
(인용: Mark Hulbert, 월스트리트저널)