The Wall Street Journal recently highlighted an article titled How to Play a Market Rally. The first line of that article is an all too familiar piece of active management advice, “Forget buy and hold. It’s time to time the market.” The article degrades from there.
The article includes, of course, the point that an investment in a S&P 500 index fund would have returned near zero percent over the past ten years, spoken in prose that suggests there are actually people who only invest in the S&P 500. I’ve never met one. Have you?
The authors then move along to show that tactical asset allocation funds delivered a whopping 5.8% over the past ten years, as this is somehow justification for using active management. BTW, I checked that data in Morningstar Principia and found that the load-adjusted return was only 5.2%.
Wait a minute…..5.2% – or even 5.8% – isn’t a great return! It’s fine for active management, but a simple diversified portfolio of index funds that were rebalanced annually performed at least as well, if not better than these active allocation geniuses.
I recalculated the results from several portfolios that I have listed in my book, All About Asset Allocation. These portfolios held a combination of U.S. large and small stocks from U.S. and international markets, micro-cap, U.S. and international small-value stocks, emerging market stocks, REITs, a total bond fund, high yield bonds, and TIPS. For simplicity, I rebalanced each portfolio annually.
Sure enough, these simple buy, hold, and rebalance portfolios returned over 6.0%, compounded annually during the same time period in all but the most aggressive portfolios!
Burton Malkiel is a Princeton University professor, the author of A Random Walk Down Wall Street (new 10th edition), and a life-long advocate of low-cost passive index investing. He recently defended his position and mine with an Op-Ed article in the Wall Street Journal titled ‘Buy and Hold’ Is Still a Winner. If you have access to the WSJ.com, read the article.
The death of buy and hold has been greatly exaggerated by those who profit from active management. Don’t believe it. A buy, hold and rebalance portfolio works.
Create a portfolio allocation that fits your needs, implement it, and maintain it.
