The Buy & Hold Scam

Subject: The Buy & Hold Scam Thu Feb 18, 2010 5:33 am

Quote :: As everyone knows, over time equities will always outperform bonds. The downside is that shares are also a good sight more volatile, so that sometimes there are quite prolonged periods when they seriously underperform. Two important studies published this week - the latest Credit Suisse Global Investment Returns Year Book and the annual Barclays Capital Equity Gilt Study - provide ample graphic illustration of these trends. ... A thousand dollars invested in US equities in 1900 would today be worth $727,000, according to the Credit Suisse study. These numbers are adjusted for inflation, so that's a fabulous real rate of return of 6.2 per cent. Bonds and bills don't come remotely close... The over-riding message from both studies seems to be buy equities and dump sovereign debt. If this seems to be a statement of the bleedin' obvious, it is at least nice to know it is supported by the historical data. It's not just gut instinct. - UK Telegraph

But get this:

Quote :: ...just because people invest in equity markets and reap gains during certain parts of the business cycle does not mean that stock markets are in any sense a mechanism that can predictably provide for one's retirement. In fact, we would argue that buy and hold strategies are merely massaged, numerical promotions intended to fool people into thinking markets are something they are not. Here's Jeremy Warner, the author of the above article, on the doubts he has about the studies he's mentioning (and generally lauding):

I have to admit to being faintly suspicious of these [Credit Suisse] numbers, in that by the authors' own admission, virtually all this return comes from reinvested dividends. The gain is derived from the compound interest effect, not capital growth. In practice, dividend income is rarely all reinvested in this manner and in any case tends to get eroded by tax and other deductions. I also question whether these long term assessments of the return on equities fully take into account corporate insolvencies, where all capital is wiped out. Certainly stock market indices tend not to. They are better at capturing the upside of equities than the downside. When a company goes bust, it will merely be discarded and replaced by another which does have value.

Anarcho-Capitalist Categorical Imperatives