“Next phase, new wave, dance craze, anyways
It’s still rock and roll to me.”
The proliferation of Exchanged Traded Funds (ETFs) has changed the face of investing and the relationship between investors and their advisors. More and more investors are realizing the benefits of low-cost and tax-efficient investing over traditional active strategies.
Many asset managers, fund companies and advisors are attempting to capitalize on this investor realization. “Tactical” strategies involving sector rotation (choosing financials over energy or consumer staples over technology), asset class allocation (choosing small caps over large caps, US over international, commodities over bonds), “momentum” based strategies and similar ideas are all the rage today.
“Oh, it doesn’t matter what they say in the papers
‘Cause it’s always been the same old scene.”
These strategies all were once known by a different name: Market Timing. It didn’t work when we called it market timing, and it doesn’t work now. These strategies will generate the same costs and taxes as their predecessors and fail at the same alarmingly high rate.
What’s the matter with the clothes I’m wearing?
“Can’t you tell that your tie’s too wide?”
Maybe I should buy some old tab collars?
“Welcome back to the age of jive.”
The same proponents of market-timing based strategies will be all too happy to carry the banner of “Buy and Hold is Dead!” They said that a strategically allocated long-term portfolio is the polyester leisure suit of today’s investing marketplace. But are they right? Has buy-and-hold failed?
Let’s take a quick look at a very boring portfolio:
- 40% Vanguard Total Bond Market Index
- 30% Vanguard Total Stock Market Index
- 30% Vanguard Total International Stock Market Index
During the ten-year period from 2/28/2003 to 2/28/2013, with annual rebalancing this portfolio returned 8.82% (before any outside advisory fees or taxes). It did so with roughly 2/3 the risk of the S&P 500 (10 year beta of 0.65) and average annual expenses of about 0.21%.
Investing is not without risk. The worst 12-month period for this hypothetical portfolio was -27.62% from March 2008 to March 2009, immediately followed by a 12-month gain of 39.51% from March 2009 to March 2010.
Even from near the peak of the global market (beginning 9/30/07), the buy-and-hold (and rebalanced) portfolio returned 2.75% annually through 2/28/13. This isn’t an exciting number, but considering the peak-to-trough decline of over 50% in the US stock market, many investors would be pleased to be a cumulative 15% “above water” today.
Successful investing requires a long-term focus and a discipline to not react to short-term market noise. An investment policy statement can hold us back from the siren call of emotional decision making, and a focus on low-cost and tax-efficient investing can improve your long-term net returns.
(You may now spend an hour watching old Billy Joel videos on YouTube.)