By a large margin, the Buy-and-Hold investment management strategy is the most common investment management strategy I hear about when I meet with Minnesota company retirement plan participants.
The popularity of that approach has everything to do with the fact that both company retirement plan sponsors and company retirement plan participants exclusively promote the Buy-and-Hold retirement plan investment strategy as the best way to manage an individual company retirement plan account.
In the investment management business, it is never important what investment strategy you use. It is always important if the investment strategy you use can produce consistent and positive long-term investment results.
Company retirement plan investors have to be able to balance the amount of stock market risk they take, with the amount of investment return reward they receive.
By that measurement, the Buy-and-Hold investment strategy used in a company retirement plan account has failed miserably over the last ten years.
The approximate investment return of the S&P 500 index from 11-15-2001 through 11-15-2011 was approximately 10.47%, without reinvested dividends. The approximate investment return of the U.S. money market proxy over the same ten-year period was 19.39%.
Let me state those ten-year investment returns a different way. If you were a Buy-and-Hold investor in the S&P 500 index, and took all the risk associated with that 100% invested strategy, you don’t have as much investment return as a 100% guaranteed money market investment over the last ten years.
You took all the risk of being 100% invested in a widely followed U.S. stock market benchmark index, an over the last ten years, you have less investment performance than a money market investment.
I acknowledge that keeping 100% of your company retirement plan account in the money market account for ten years is not a prudent, long-term investment management strategy. My point is that neither is Buy-and-Hold a prudent, long-term investment management strategy.
Buy-and-hold is not based on fact. It is only based on faith. The Buy-and-Hold investment strategy requires an individual company retirement plan participant to not pay any attention at the world-wide economic realities of the present day, with the faith that the investment returns will be there over the long term.
The U.S. stock market is never immune to the national and worldwide economic cycles of boom and bust. Your company retirement plan investment management strategy has to reflect those realities.
You need to manage stock market risk in your company retirement plan. The first step towards managing that risk is to acknowledge that a Buy-and-Hold investment management strategy is not a good long-term option.