Don't Want To Lose Money In The Stock Market? Buy And Hold For 20 Years

The longer you hold stocks, the better your inflation adjusted returns are, AllFinancialMatters demonstrates. For instance, compare the S&P 500 Annual Real Returns from 1926-2006 with a 1-year holding period vs a 20-year in the picture above.

For a 20-year holding period, there are zero negative returns. Kinda astounding. However, the peaks are dramatically less than can be achieved in a 1-year time span. There’s a story about a turtle and a bunny that may be applicable here.

Then again, as commenter Ironchef points out, these results are in aggregate. Some individual stocks are just dogs no matter how long in the tooth they get. — BEN POPKEN

Why the Long-Run Is So Important When Investing in Stocks [AllFinancialMatters]

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  1. ironchef says:

    There are serious problems with that rule.
    Behold…if you held these stocks for the long term, you’d be in the poor house like shares of Pets.com

    [finance.yahoo.com]
    [finance.yahoo.com]
    [finance.yahoo.com]
    [finance.yahoo.com]

    The bottom line…know when to bail out.
    You don’t get hero points for going down with a sinking ship.

  2. swalve says:

    Only the lucky would just say “buy stock and hold onto it”. Yeah, grandma bought three shares of AT&T in 1921 and now it’s worth $80 million, but that’s luck.

    I wonder what the percentage of publicly traded companies is who are even in business 20 years later?

    Jim Cramer says “buy and homework”, meaning you have to keep up on the stock and be ready to sell it when it turns into a dog. Because everything does.

  3. alpha says:

    Or buy and hold index and sector funds so you have much less to worry about. If an entire index or sector collapses, we’ll probably have other things than just that money to worry about.

  4. tcp100 says:

    It’s a little easier than all that.

    1. Buy an index fund, with low expenses and a diverse basket of stocks.
    2. Wait.
    3. Profit.

    You could do exactly what these charts show by just buying some shares of SPY, DIA, or a fund like VTSMX.

    Behold: [finance.yahoo.com]

    Yes, over a 5 year period, say, 1998-2003 you’d bein pain. But, if you held since 1996, and kept adding money all throughout, you’d be ahead nicely right now – considering that the price chart does NOT factor in dividends and dividend reinvestment.. I’m not sure if those illustrative charts do, either.

    This isn’t really new news – the basic conventional wisdom on the street was that the S&P 500 has NEVER lost money over any 20 year period since its inception. There’s a lot of theory and science behind the upward bias of stocks, but that’s more mumbo jumbo that doesn’t belong here.

    Even so, charletans like Kiyosaki will tell you to get rich quick flipping houses because the Stock Market is a lottery.

    Tell that to Casey Serin.

  5. BillyMumphry says:

    tcp is right. Single stocks are a rare payoff for the individual investor.

    As a trader at a hedge with 1b+ aum i have a unique perspective that i definitely did not have before my employment even though i “knew” a great deal about finance and the markets. The bottom line is the individual investor at such a tremendous disadvantage to the large funds of the world, and even individuals trading their own money for a living.

    If you are not watching the markets literally every minute of the day, you will struggle to succeed with all but the most blue of the blue chips. That rumor you read in BusinessWeek, or that tip you got from smartmoney and even the analyst coverage on CNBC, was read on bloomberg or various professional news services (not thestreet.com) and known throughout the street hours, days, even weeks before you saw it.

    Do yourself a favor: buy some SPY’s, a mutual fund, and an etf and hold onto some of your money.

  6. tcp100 says:

    @swalve: “I wonder what the percentage of publicly traded companies is who are even in business 20 years later?”

    I’m sure there’s a way to find an exact number, but take a look at the dow:

    [en.wikipedia.org]

    General Electric has been there since its inception in 1896. The other companies – like 3M, IBM, Alcoa, AT&T, Intel, General Motors, Hewlett-Packard, J&J, Boeing – have all been around 25+ years.

    The basic concept is that over time, the “boring” stocks will treat you a lot better than flash-in-the-pan speculation. While interesting, and offering the chance of quick millions, penny stocks and start-ups generally aren’t where the money is made in the market for individual investors.

    There’s a great chart in “Stocks For The Long Run” that shows what $1 invested in Gold, Real Estate, Bonds, Cash, and Stocks would end up with over something like 200 years. The difference is shocking, for those of you who think savings accounts and CDs are good enough.

    Here’s a really cool tool: “What If I Had Invested” at Sharebuilder:

    [www.sharebuilder.com]

    Take $14,000 invested over 11 years, first in “boring” investments:

    GE: $100 in 1996, then $100 a month: $25,670
    S&P 500 (SPY): $100/$100 since 1996: $21,780
    3M: $100/100 since 1996: $28,789

    Compared to some ex high-flying tech stocks, despite their massive highs and dismal drops:

    Dell: $100 in 1996, then $100 a month: $27,268
    CSCO: $100/100 since 1996: $24,270
    Ebay: $100/100 sine 1996: $23,628

    So, over time things to smooth out.. (Of course, there are always exceptions, but will you be lucky enough to find ‘em?)

  7. tcp100 says:

    Wow, the links really messed up on that comment. Weird.

  8. enoughwealth says:

    Yes, with a 20-year timeframe you’re highly unlikely to make a loss. BUT, if in 20 years time I’ve only averaged a 1% real return on my stock investments (less than I can get from an at-call, guaranteed online cash account) I’d be disappointed if I’d invested only in stocks. It’s like when I did some monte carlo models of possible outcomes for my investments using historic return and risk data – the average looks good, but it’s important to remember that you only get one bite of the cherry in reality. It’s just as likely you’ll end up with a 1% real return over 20 years as the 12% real return. That’s why most people would choose to asset allocate across a wide range on asset classes so that they have a more certain outcome. I’d rather be sure to end up with a real return after 20 years of between 4% and 7%, than invest only in stocks and end up with anything between 1% and 12% annualised real return.

    Regards
    [enoughwealth.co]

  9. Chicago7 says:

    Except if we get 20 years of Bush like economics. Seems unlikely, but it could happen.

  10. Chicago7 says:

    Isn’t the problem with buying and selling the costs? Fees and trading costs eat up your gains, even IF you manage to beat the S&P. A few of the larger S&P funds have really low fees.

  11. thparadox says:

    Buy and hold is a joke. If the market crashes in the next 20 years, chances are you’ll be jumping on the panic button. Good luck.

  12. sr71pav says:

    Bush economics are bad how? We’re at record highs on the exchanges. 9/11 did more harm than Bush has, and we’re still on the uptick. In the end, ANY president has almost no impact on the economy, good or bad, the market feeds itself.

  13. BillyMumphry says:

    @Chicago7:

    Don’t get the Bush jab…say what you want about him but this market is absolutely absurd. New highs daily. Pay attention. And like sr71 said, presidents of today have no bearing on market performance. Unless they are killed. That’s bad.

    As far as fees are concerned, most brokerages have a pretty reasonable fee structure if you are trading with decent amount of money. It is a problem if you are buying 100 shares and paying $20/ trade.

  14. Havok154 says:

    So, should I keep holding onto these Acclaim Entertainment stocks?

  15. huadpe says:

    Yes, you will make better than inflation over 20 years holding an index of the S&P. But if you have time and an ability to take risks, individual stocks can pay off big. In my college fund we bought AAPL (Apple) in the mid ninties at about $4/current share. It is now over $120. Those kind of returns are rare, and we could have lost the whole thing, but sometimes you buy the company that makes the next iPod (literally in my case). Wanna make between 3 and 7% per year, go for the S&P, wanna make between -30 and +100% per year, go with non-blue chip stocks.

  16. BillyMumphry says:

    actually the s&p’s have averaged about 10% r over a 30 period. About 9% CAGR….

    You would be doing very well to beat that over 3 decades with a portfolio full of 4 letter stocks.

  17. shoegazer says:

    Does anyone have an opinion on investing in ETFs vs. managed index funds? I’m currently thinking of moving some money over because the fees are lower and it’s generally accepted that ETFs outperform managed funds in a good market but do worse in bad ones. Is the difference worth mentioning, or should we continue to rely on fund managers and their minions?

  18. BillyMumphry says:

    well like you stated, etf’s outperform in a good market…which we are currently riding and not looking back. Throw some money in some iShares and watch, if the market starts trending down you can always sell.

  19. Trai_Dep says:

    US Presidents do affect the economy, just not over a period of time that the financial press cares about (next quarter).

    Investment/infrastructure rates, tax rates, trade policies, fiscal policy, impact on global politics… I could go on.

    True, it used to be that, no matter how big a dunderhead the President was, the Powers That Be would ensure he was surrounded by Wise Men to ensure he wouldn’t f*ck up the fundamentals too badly was a reasonable assumption to make. But Bush blew clear past those days.

    Prescription care for seniors, or irrational shifts favoring the uber-rich over the middle class are two examples just off the top of my head. Helpful for his base, bad economic policy for an advanced country.