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Is buy-and-hold dead? Will the “long term” be shorter than the millennium? Are stocks risky business? Does the road ahead promise craters and fallen trees, or passage to the other side? Here’s some advice on what to do with the ashes of your portfolio.
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So stocks crashed and portfolios went up in flames. That can’t be changed unless you borrow a page from the Book of Bernie (as in Madoff) and dream up your own figures. The question now is how to fire up the future.
We’ve asked four area financial mavens for their counsel in these times of tattered nest eggs. In their view, the sky is neither falling nor endlessly blue. To weather storms, investors need perspective and patience.
“The long-term concept changed with the dot-com era. People were seeking more instant gratification,” says Irv Rosenzweig, president of Rosenzweig & Associates Wealth Management Group in Media. “The new paradigm was [bidding up] companies with nonexistent earnings. We can see where that ended.”
But endings lead to new beginnings. Hank Smith, chief investment officer at Haverford Trust, cites a study showing that every 10-year period since 1926 in which stocks returned less than an average of 3 percent per year has been followed by an average annual gain of 12 percent (price appreciation and dividends combined) over the next 10 years. The longer the period, the better stocks generally tend to look.
This decade, however, has given investors two exploding bubbles—dot-com in 2000-01, and real-estate/banking in ’08—and they’ve prompted some unnerving comparisons. Last November, the S&P 500 index fell to its lowest level since early 1997. Not exactly the path to a comfortable retirement.
So now the question is whether stocks will bounce back, as history shows they always have. Smith, for one, is betting they will. “Our macro theme for 2009 is ‘reversion to the mean,’” he says. “They revert to their historical averages—across all asset classes.”
Eventually. The long-term average annual return for stocks has been about 10.5 percent. Will they get there this year?
The true measure will involve a longer period of time. That brings up the very notion of “long term.” What exactly does it mean? In the long term, a wise philosopher once said, we’re all dead. No argument there.
But many of us will be drawing breath for some time to come. And with longevity in a bull market, there’s an increasing likelihood that individuals will be parted from their money before they die. In that scenario, cash won’t cut it—unless you happen to have a vault’s worth.
“If you stop working, your money has to work harder,” says Joel Goodhart, managing partner with BIRE Financial Services in Plymouth Meeting. “The stock market is still the only place to be in the long term.”
Goodhart identifies long-term funds as money you won’t need for at least 14 years. That money is best invested in equities (stocks in one form or another). Keep short-term money—enough to meet your needs for the next seven years—in bank accounts, CDs, money markets and U.S. treasury obligations of short duration. Personal circumstances determine whether the seven-year gap between the two is short term or long term.
As for the money that’s invested in equities, Goodhart makes a strong case for sitting tight. One study reveals that the S&P has been up an average annualized 9.6 percent in the past 25 years. But if you take out the best 25 days, the gain is only 3.8 percent.
Other advisors put one’s staying power to an even sterner test. “Getting out and getting back in is a recipe for disaster,” says Scott Donaldson, a senior analyst with Vanguard. “You need to be in there the whole 40 years.”
To jump ahead to "Don Lancer’s Airtight Recession-Survival Tips," click here.
