Buy and Hold is a passive investment strategy that involves buying stocks and holding them for long periods of time... never selling regardless of what's happening in the market. Although it can be used with individual stocks, this article will discuss the merits (or not) of this strategy as applied to index funds tracking the S&P 500, which are a popular and low cost way for the average investor to "be in the market".
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There are a whole bunch of numbers on the internet being thrown around and proclaimed as the long term return of the U.S. stock market. Anywhere from 7%-11% depending on who you believe. This number is the basis for a lot of folks' investment decisions and its accuracy is not something to be taken lightly... especially when a couple of little problems become apparent when you stop to think about the methodology most commonly used.
So I've decided to go into the historical data for the S&P 500 index and try to calculate it for myself. If you think this article is going to be about the hottest new stock or cryptocurrency... you are mistaken. That's because the "best investment ever" has nothing to do with the financial markets at all. In life, there are a few investments you need to focus on first before you even worry about stocks, bonds, real estate, or bitcoin.
One of which is your health. What's the point of busting your hump your whole entire life and accumulating millions of dollars for your golden years if you're going to spend two thirds of them in a nursing home? Your mortgage rate is 3.75%. The stock market returns 7-10% on average (depending on who you ask). You'd have to be an idiot to pay extra on your mortgage when you can make so much more in the stock market.
Right?
Do you subscribe to any of these beliefs? When it comes to portfolio allocation, the conventional advice is to move more of your portfolio into bonds the closer you get to retirement. "Bonds are safer than stocks" goes the mantra. After all, what makes bonds "safe" is that you receive a guaranteed rate of interest and you get paid before the stockholders do if the company goes belly-up. And for those that prefer bond mutual funds, they supposedly fluctuate less than equity (stock) funds. Bonds and bond funds are therefore supposed to cushion the risk of stock market crash.
In this article, I will talk about how blindly following this advice can be dangerous to your portfolio. |
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An alternative minded Investing and Personal Finance blog Archives
February 2019
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