Great Returns from Buy and Hold

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I wrote a reply to an article that put down buy and hold investing the other day and the way I ended my response was to show that through buy and hold investing my net worth has increased almost every year – and not by a little.

First a definition. Buy and hold investing is where you invest with the intention of holding onto your investments for a long time period. What buy and hold investing is not is: buy and forget, buy and ignore, buy and hope, buy once and hold.

That last one is really the key. People who put down buy and hold investing seem to think that there is no way to take advantage of market opportunities unless you actively trade. That’s non-sense. When the market dips you can buy more, at a lower price, which is what you want to do, buy low and sell high.

The other mistake opponents of buy and hold investing make is to assume that stock and bond investing is all there is to a diversified portfolio. Well the more money you have the more you can branch out into other things such as commodities like gold and other metals, real estate, or a side business. Also don’t forget that you are your best means to diversification and should not discount your ability to increase your salary by getting promoted or changing jobs.

Since opponents of the buy and hold method often assume that stocks are your only investment they like to point out that these past twelve years have been flat. They’re right if they ignore two very important things that simply can’t be ignored: dividends and dollar cost averaging. Dividends are distributions of a company’s profits to their shareholders. Dollar cost averaging is the technique of buying stock (or mutual funds) on a regular schedule regardless of the share price. The idea is that you end up buying more shares when prices are low and fewer shares at the high price. As stock or mutual fund prices fluctuate you do better than simply buying once and forgetting.

S&P 500 over the past 10 years

I use a modified dollar cost average technique of my own. I invest at regular intervals through my 401k at work. In my personal investment accounts, I will accumulate cash and buy only on days the market is down. If the market has been rising steadily I’ll buy less often and accumulate more cash. If the market has been doing poorly and has one bad day after another, the accumulated cash allows me to buy more frequently. This technique takes discipline, there’s no doubt about that. The important thing is that I have been fully invested throughout so I haven’t missed any of the gains and because this is not money I need in the short term. 

As I mentioned at the start of this post I ended my comment to the other article by providing the percentage increase in my net worth over the last twelve years (there’s a benefit to being a financial nerd). So here it is in chart and graph form:

My net worth percentage change chartMy net worth graph

Please note that this does not depict my stock performance only but is an overall net worth. I feel this is a more accurate picture of all my investments, not just stocks. As you can see there were only two years that I had a negative return. The graph shows the dollar figure of my net worth (numbers removed for obvious reasons) in red and the green at the bottom is the amount by which my net worth increased or decreased (the chart in graph form).

None of this can be achieved without a plan and the discipline to stick with it. Do you have a plan for how to increase your net worth each year? Share your techniques in the comments section.


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Sticking with the Plan

PlanningWhat Next is more than just searching for new ideas, new challenges. What next is also about planning and preparation. I write “It’s not the plan for the expected outcome that saves you, it’s the plan for the unexpected outcome that does.” Planning for the unexpected means leaving yourself options for almost any circumstance.

Financial decisions play a large role in our lives (which is why I became interested in Going Downfinancial planning) and with the recent market mayhem, planning has proven its worth. But this insanity in the market pales in comparison to 2008. From May 2008 until March 2009 stocks lost around 50% or more of their value. A lot of people couldn’t handle watching their retirement nest egg dwindle away so they sold. They sold because they reacted, because they had no plan.

A new study by Fidelity Investments has some important information about what happened to those people who panicked and what happened to those who had a plan, who didn’t react without thinking.

401k investors who reduced their stock allocations to zero between October 1, 2008 and March 31, 2009 and kept it that way until June of 2011, saw an increase in their 401k of only 2%. The investors who reduced stocks to zero but began investing again sooner than June 2011 saw an increase of 25%, much better. But the people who stuck with stocks, and continued investing, in spite of the precipitous decline, saw their 401k balance increase by – are you ready for this – 64%!

These people had a plan and they stuck with it. Warren Buffett’s Berkshire Hathaway has had a large amount of cash available and they’ve done nothing with it for years. Now, however, Buffett says he’s buying stocks that are “on sale.” “Be fearful when others are greedy, and be greedy when others are fearful,” says Buffett. His plan was, and is, to buy stocks that he feels are undervalued and that doesn’t happen when the economy is doing great.

I did not expect stocks to decline as much and as quickly as they have but my planning has allowed me to do two very important things. First I’ve increased the amount of money I’m contributing to my 401k. Increased, not decreased! And second, I’ve used money I didn’t invest as the market went up to buy stocks that are now “on sale.” I’m no Warren Buffett but I have a plan and I’m sticking with it.

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