Sunday Musings: How Long Is Long-Term?

Yesterday, I tried to shed some light on the question as to whether over time maximizing gains is a better strategy as opposed to minimizing losses.

I used the past 8 years of this century and concluded that in fact minimizing losses is a better long-term investment solution. The question remains how long should long-term be when used as an investment horizon?

If you ask the buy-and-hold proponents, you will immediately get the good old stand-by quote that equities have compounded annually at some 9% over the past 50 years. While that sounds great on the surface, it does not tell the entire story. It totally neglects the fact that you have to go through extreme portfolio pain (translation: sharp bear market drops) with years spent of making up losses in order to get to that 9%.

It simply is not reality to follow such a scheme, unless your parents set up an investment account for you when you were still running around in diapers and made regular contributions, which you later on continued without fail until you reached age 50. In that case, I can somewhat accept the 50-year buy and hold scenario.

Unfortunately, this is not how the real world works. I have witnessed it to play out more like this: A young person gets a job, and if he is lucky someone talks him into opening an IRA and making a regular contribution of $2,000 a year starting in his early 20s. Modest success lets him keep the contributions going and in his late 20s he’s got some $15k stashed away. Then all of a sudden, he’s got to have that new fishing boat—and there goes his IRA.

Years go by before he recovers from this “loss” and actually gets around setting up a new one. A few years later a hot opportunity lurks with a private placement—and there goes the IRA money again.

I am not making this up; I have actually witnessed this very example with clients many years ago. I have concluded that most people don’t really get very serious about retirement savings until they reach their forties. Add marriage, children and a home purchase to this equation and you can see why most people are getting delayed with retirement contributions.

From my experience, this scenario seems to be the rule rather than the exception. Given that, most people don’t really have much time to build their retirement assets. That means if your time frame to accumulate is shortened, you have to be very careful as to how you invest your money. You certainly don’t want to add insult to injury by losing big in a bear market and then spending years having to make up losses rather than adding profits.

That is the danger point many have reached. In only 9 years during this century, we have witnessed 2 bear markets, which have put many portfolios in the loss category century-to-date. This current bear is far from being over and the big unknown is how long will it take for many to make up last years devastating losses?

Yes, we’ve had a nice recovery over the past few weeks. This has helped those hanging in there with buy and hold to recover, but they still have a long way to go before they reach the break even point. If this market reverses and heads further south again, more portfolio pain will be inflicted.

My issue is that you are simply asking for trouble when looking at investment returns that are too far out in terms of time frame, because you won’t live long enough to see that 9% over 50 years. It makes more sense to me to not put yourself in that helpless situation of letting the financial markets run your life and determine your fate instead of the other way around.

Using trend tracking, or any approach that advocates the use of sell stops in some form, is far more preferable than being a mindless buy-and-hold investor. You simply don’t have enough time to wait for the rewards to come in.

Just ask any 60-year old investor, who has just seen his $1.2 million retirement portfolio slashed in half last year, how he feels about the long-term buy and hold rewards. You will not like his answer.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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