Fund Blawg

As the bear market continues to wipe out mutual fund investors I thought now would be good time to revisit the buy and hold fairy tale. This fairy tale has friends of mine continuing to hold their mutual funds as their retirement savings are devastated. According to the buy and hope crowd, the market goes up in the long term so just hold on. To prove their point they say that over the 80 years the market has gone up and average of 8% annually. This is a meaningless and misleading statistic for most investors and here's why: investors don't invest for 80 years, the long term is maybe 20-25 years for retirement. Given this greatly shortened time horizon losses that take years to recover can prolong the amount of time that must be spent saving for retirement

The reality is that buy and hold is not a strategy; it is based on torturing statistics to show the market in the best light. Take the case of Fidelity Magellan, one of the largest mutual funds in the US. The fund has last 44% year-to-date! The chart below shows what would have happened to a buy and hold investor going to back to 1995.

 A buy and hold investor in Fidelity Magellan has less money today then he did in 1995. So much for buy and hold. And as I pointed out in my last entry on the The Real Bear Market, since 2003 Magellan could not even match the high it made in the year 2000.