Stocks for the long run

One of the major developments within the financial industry over the last half-decade or so has been the ascendance of passive investing as a discipline.   The reasons for this are not hard to discern; the performance of active managers as a class has lagged major benchmarks and the fee schedules are, by and large, unappealing.  In many cases, managers who appear to possess a genuine edge (e.g., Renaissance Technologies) are either closed to new investors or only manage proprietary capital.   (And no, humble pie does not constitute a genuine edge.)

Amidst all the tutting from the proponents of passive buy and hold investing, however, there seems to have emerged a smugness that evninces itself every time the SPX flirts with a new all time high, as it has since the election.   The chart below is a few years old but still gets trotted out with regularity when equities are at their peak, usually as a justification as to why you should never sell (or why it was a mistake to have sold your SPY or Vanguard 500 holdings.)

While it is certainly true that the long term trend for equity prices has been higher, it is equally the case that there is no guarantee, as seems implicit in the commentary of the passive investing fetishistas, that they will go up during one's investing lifetime.  There have been several occasions when stocks have delivered no returns over periods of 30 or more years.  It's all well and good to look at the chart and say "well, ya should have been long", but the higher the valuations are today, the lower the expected return is tomorrow.  As the small print promises, past performance is no guarantee of future returns.

Of course, virtually all of the praise for buy and hold passivity that Macro Man has encountered has come from the United States.   A healthy dose of this has no doubt been warranted, given the ability of the finance industry to separate the consumer of retail financial products from his money.   That being said, the belief that buy and hold is some sort of optimal strategy likely rests on a foundation of American exceptionalism.  After all, how do you think Greek investors feel about a passive buy and hold strategy?

OK, Greece is just small country.  What about the Eurozone as a whole?   Let's talk when the total return of the Eurostoxx eclipses its 2000 highs.

One wonders how much traction the buy and hold message would have here.  Still, despite the sovereign crisis the Eurostoxx has been the land of milk and honey compared to Japan, where total returns are at levels first reached nearly 30 years ago.

So sure, by all means if you don't have a view, take your equity risk with index products and be happy with the market return.  (No, seriously!)  But just remember that the long run on a 400 year chart is a lot different than the long run for a 40 year old guy looking to put a few kids through college and have a few nickels left over for retirement.  Valuations matter, there's no guaranteed pot of gold at the end of the Vanguard 500 rainbow, and while over-trading is a cardinal investment sin, so too is willfully sticking your head in the sand and dismissing the need for thought.