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By Simon Bottle, Jun 17 2014 09:07AM

Most of the investment management industry would still argue that buy and hold of developed world stocks is the right asset class going forward, as the engine of an investment portfolio. We would argue that history shows that’s not necessarily a smart place to be.


Markets since 2008 have made the task of managing clients’ money massively more difficult and there is no guarantee that the next 5 years or even decade will be any easier to navigate. Whilst the global financial crisis saw losses of over 50% in many markets, falls of 20% (a level often used to define a bear market), are just as frequent but can still cause significant recovery time.


From 1927 until June 2012, bear markets in the US (using the S&P500 as the reference), have occurred every 3.7 years. The average decline during a Bear Market has been 40.88%. A loss of 40% (which is close to the S&P 500’s drop in 2008) requires a recovery of over 65% just to breakeven.


The reality of stock markets is that bear markets do, and will continue to happen and thus investors need to employ strategies that seek to limit losses providing the benefit of steady gains, with capital preservation as the priority.


The FTSE 100 all-time high 14 years ago in 1999 was 6950, the 2007 high was 6574, and we care still we below 7000, so on a buy and hold basis, markets have gone nowhere for 14 years. If you then factor in inflation then investors are a long way underwater. And investors sadly often buy high and sell low, which means that in trying to time the markets, they regularly end up even worse off.


We are currently 9 years into the current secular bear market which, given the state of the fundamentals out there could last another decade. And let’s make no bones about it we are still firmly in a bear market. Again the powers that would try and convince you that the rally of the recent past is the beginning of a new secular bull market when all that has happened is a grind back to levels still below that of 1999! The jury is out!


We’re not saying that equities don’t have a place in a portfolio at all. However do not rely on buy and hold of developed market stocks to be all right on the night, especially right now where they are expensive.


As an aside, bonds are the traditionally more conservative portfolio mainstay. They have their own issues too. A recent Barclays equity gilts study showed that government bonds in their opinion will deliver a negative 2% total return the next five years. So to get a decent fixed income return, investors are having to invest in non-investment grade yield bonds, which carries significant risk.




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