Buy and Hold Strategy Can Pay Off

If advisers can convince their clients to stay in the market, investors might find it pays off.

A compilation of historical market data from Putnam Investsments shows it may well be worth it for investors to resist the temptation of selling in a trough and keep their holdings until a market recovery.

A Putnam release said the key take-away from the market data was that a market recovery will develop eventually and will benefit buy-and-hold investors.

Putnam said there have been 12 bear markets in the last six decades during which the markets plummeted a total of 22.4% before turning around after an average of 14 months. The 12 bull markets since 1948 have lasted an average of 45 months, each growing an average of 123.9%.

According to Putnam, a $10,000 investment in the S&P 500 Index in 1988 would have grown to $72,932 by June 30, 2008, despite the 43% downturn of 2000 to 2002.

“Whether the current bear market has reached a bottom or not is unclear, but one thing we know from this study is that market gains have more than made up for losses for those investors who stayed invested over the long term,” said Elaine Sullivan, Head of Retail Marketing, in the release. “The market has always recovered, but by trying to predict the best time to buy and sell, investors may miss the market’s biggest gains.”

Bull Markets vs. Bear Markets (12/31/48-6/30/08)
Percent of time in economic recessions72%28%
Percent of time in economic expansions78%22%
Average length (months)4514
Average annual return23.5%-20%
Average cumulative return123.9%-22.4%

Source: Putnam Investments, using data from S&P 500 Index

Putnam’s summary of the historical market data is available here.