Revenge of the Buy-and-Hold Nerds

05/06/2010 2:11 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

Updated Friday, May 7th, 2010

I got a nice surprise when I looked at my account statements recently: Was I really back to even?

Over the weekend, I pored over some old statements, crunched some numbers, and voila! My accounts had recovered nearly everything they had lost during the financial crisis and bear market. Even after this week's tumultuous selling, my accounts are still within a few percentage points of where they were.

That doesn’t include subsequent 401k contributions, which actually put me ahead of where I was. Our daughter’s 529 college savings plan is also in the black again.

I say this not to boast—I’m a good investor, but no genius. Otherwise, I’d be lounging on a yacht in the Caribbean sipping a 1990 Chateau Margaux and thinking Great Thoughts.

Because the stunning fact is, I’m not alone: Two leading financial advisors tell me a lot of their clients are in the same situation.

We’re just average, hard-working Americans who save, invest, plan for the future, and remain aloof from cable-news shout fests, blogosphere conspiracy theories, and scare-mongering spiels from shameless investment pitchmen.

We had truly diversified portfolios and stuck to our guns when times were toughest, continuing to re-invest dividends and contribute to our retirement plans.

So, not only did we limit our losses during the horrendous crash and bear market, but we were already in stocks when the giant rally began last March, and didn’t have to outguess the market all the way up.

Call us the “buy-and-hold nerds,” and for now, at least, we’re winning.

Christopher J. Cordaro, wealth manager at RegentAtlantic Capital in Chatham, NJ, says many of his clients are in this position. “Some are back to even, some are close enough to even,” he tells me.

“By and large they’re amazed, especially when you put it in perspective,” he continues. “A little more than a year ago, you thought the world was going to end. Now you’re back to even. That’s remarkable.”

Who can forget those days? For six months—from the fall of Lehman Brothers in September 2008 to the market’s bottom in March 2009—talk of another Great Depression was everywhere. Credit had dried up, and companies of all sizes were firing people first and asking questions later.

By March 9, 2009, the Standard & Poor’s 500 was trading near 667, having lost a sickening 57% from its October 2007 peak. The blue-chip Dow Jones Industrial Average was wheezing along at 6547.

But many investment gurus—I interviewed several—were expecting the market to tumble even more, to Dow 4500 and the 400s in the S&P. Others, lamenting a “lost decade” for stocks, urged investors to abandon buy and hold for more active trading—with their paid services, of course.

How’d that work out, guys?

A handful of people did call the market’s turn—Jim Stack of Stack Financial Management and Dan Sullivan of the Chartist were two who spotted it early. But most investors lack the nimbleness and laser focus of the superstars, so buy-and-hold investing is the only way to go with most of your money.

Besides staying the course, the other key ingredient was how you invested.

“It all depended on your equity allocation,” says Cordaro. “If you were more balanced, you’re probably back to where you were.”

In other words, “buy and hold” wasn’t the problem; what killed many Americans’ portfolios was that they were far too invested in stocks—sometimes 70% to 80% of their assets, even for retirees. That’s just crazy.

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No wonder so many people have rushed into bond funds! Although that, too, may turn out to be a bubble, the move came from investors’ legitimate concerns that they were too exposed to stocks. And Wall Street shouldn’t count on that money flooding back into the market, either.

“Most people are happy with their allocation now,” Cordaro says.

My own portfolio was a good example of that. I won’t tell you how much is in it, but here’s what it looked like in late 2007.

chart

My 50% stock position was balanced nicely by 17% bond holdings and 26% in cash—again, not because of any premonition about the market I had, but out of sheer inertia in getting the cash invested. Still, it and the bonds were valuable buffers. I also had 7% in hedges, commodities, and currencies, mostly through ETFs.

(The current allocation is 46% stocks, 26% bonds, 21% cash, and 7% other. I’ll probably sell some bonds to put more money into stocks during market corrections.)

My February 28, 2008 column, “Your Ideal Portfolio for Now,” written two weeks before Bear Stearns’ collapse, recommended a similarly diverse but even more stock-heavy portfolio.

Without any rebalancing or reinvestment of dividends—and assuming a very slight return on cash and modest stock dividends and bond yields—that portfolio, too, is close to break even.

This apparent recovery in many Americans’ portfolios is good news for the economy. Because of the “wealth effect,” rising asset values prompt consumers—especially the more affluent—to spend more, and the statistics bear this out. 

Personal spending grew by 0.6% in March, a nice bump. That outpaced income growth, helping the saving rate drop to 2.7%, its lowest in 18 months.

Marilyn Capelli Dimitroff, president of Capelli Financial Services in Bloomfield Hills, Michigan, says her clients are spending more, buoyed by the recovery in the markets.

“There’s significantly less fear now,” she says. “Everyone feels able to spend a little more.”

But they’re not going nuts. “It’s not as if everyone has the attitude, ‘happy days are here again,’” she adds.

And of course, there’s no guarantee the market will hold up; indeed, the bears may have their day again. Right now, we may be in the throes of a correction, spurred by the debt crises in Greece and other European nations. Bonds, too, have had a big run, and they’re vulnerable. Cash isn’t earning much, and commodities have been moving pretty much in line with stocks for quite a while.

But isn’t that the whole point? We just don’t know which asset class will do best in the months ahead. Very few predicted bonds would do so well starting in September 2008, and few called the current stock market rally, either. That’s why true diversification and staying the course are the best paths for most of us.

So, the next time someone touts a foolproof trading system or tells you that silver coins or junior Canadian gold mining stocks are the only path to prosperity, just remember what the immortal James Brown might have said: Say it loud—I’m nerd and proud!

Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.

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