Feels like the 1970s
Commentary: Buy-and-hold is dead in a stop-and-go economy
By Simon Constable
NEW YORK (MarketWatch) — Those pesky 1970s just won’t seem to go away.
Two weeks ago I wrote that government-proposed price-caps for health care could take us back to a 1970s-style economy. See column on Obamacare taking us back to the ’70s.
Now I find one more disturbing indication of another flashback to the dodgy decade, this time in the investing sphere. The takeaway: A buy-and-hold investing strategy won’t help you for a while.
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Lawmakers are considering a fiduciary standard for brokers. Suzanne Barlyn, Compliance Watch columnist, talks with David Tittsworth, executive director of the Investment Adviser Association, about how a standard that was crafted for investment advisers can apply to a brokers’ business model.
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The reasons: Likely slow economic growth combined with an increase in cyclical volatility will push the economy into more frequent recessions, according to Anirvan Banerji, director of research at the Economic Cycle Research Institute in New York.
The economy is certainly rebounding, but that doesn’t change the fact that the U.S. economy has on average been growing much more slowly than in the past few decades; about 2% a year, he says. So expect the current strong rebound to moderate closer to 2% growth in gross domestic product sooner or later.
Layer on top of that the likely shock to the economy when the Federal Reserve starts reversing its massive monetary stimulus programs. Getting the timing right on such policy shifts is tricky at the best of times, and the Fed doesn’t have a particularly good record of picking the right moments, in recent history anyway.
Those two factors, the shocks to the economy from policy shifts and low average growth rates, will tend to mean more frequent recessions.
When average economic growth is only 2%, it is relatively close to zero, so it doesn’t take much of a knock to push the economy into recession, explains Banerji.
That is to say, unless things change radically, we could be in for a repeat of the rotten period of 1969 through 1982, when the U.S. experienced four recessions. Investors also suffered a prolonged bear market in stocks.
More recently, Japan has seen a similar period of volatile economic growth. Between 1992 and 2009, the country went through four recessions, and yes, you guessed it, a decline in the value of stocks.
For investors small and large, such a stop-go economy means that the so-called buy-and-hold strategy won’t be much help. That is the strategy where you throw money into the stock market and wait for prices to rise. That typically has been the advice of most stockbrokers for the past few decades. It hasn’t really worked for the past 10 years, and the next 10 don’t look that promising, either.
Instead, investors need to judiciously pick and choose, if not individual stocks, then sectors and asset allocations.