Is buy and hold dead? has to be one of the most pressing investment questions for anyone involved in pensions.
The answer will depend on who is speaking. A stock broker, who makes his living from transactions, will say “absolutely definitely”, a tracker manager will argue in favour of long term exposure to the market, and an active fund manager will stress the importance of long term faith in a manager, who invests tactically on your behalf.
But there is no doubt that since a huge chunk of money switched from active management to index funds about a decade ago, the FTSE 100 index failed to grow, and we have experienced two of the five most serious market crashes for a century.
It has been a deeply depressing period for those hoping to repair fund deficits via stock market performance. But the millions of employees in company default money purchase funds will similarly have little to thank their schemes’ advisers, who invested £28 billion of their money in trackers.
Yet some fund managers have made money by buying winning companies at the right time and price. The FTSE has climbed 50 per cent over the last year. Tactical investors who sold out and then bought back in again somewhere near the bottom, have hatched themselves a golden egg. But the magic goose side-stepped pension funds following a “buy and hold” strategy, as well as those in trackers.
“Buy and hold” became an article of investment faith because for the last 20 years of the 20th century, it delivered the goods. But then we were in a bull market. When everything is going up, as long as you hang on in there, you’ll enjoy the ride.
In an ideal world you appoint a fund manager to devise an optimum asset allocation, then buy and sell profitable shares with precision timing. And mind the flying pigs.
That bull peaked in December 1999 at 6930, a level the index has yet to achieve again. There could be every prospect we are looking at a Japan-style bear market, where the index has fallen for 20 years.
Trustees hoping to de-risk their schemes once the index reaches a certain level could be in for a very long wait. Yet jettisoning long-held beliefs can be a wrench, like finally accepting that Father Christmas doesn’t exist. But it can be done, if you take one step at a time.
Begin by looking at the case for buying and holding the shares of one particular company. In the old days, individuals would happily trust their savings to an individual company, of which ICI shares were totemic.
Yet the world of business has changed completely. Companies come and go, today’s blue chip are tomorrow’s fallen angels. Groups seem to be almost constantly buying and selling subsidiaries, so that a share you bought ten years ago could be in a predominantly different business today.
Finally, the “buy and hold” mindset allows no room for selling out at the top. It is almost an article of faith with pension funds that they hardly ever collect any winnings.
The dilemma is that if you ditch “buy and hold” or trackers, what do you replace them with? You could significantly de-risk the scheme, and
opt for only the lowest risk investments. But if you want to have lower risk levels, then you have to accept lower returns as well.
In an ideal world you appoint a fund manager to devise an optimum asset allocation, then buy and sell profitable shares with precision timing.
And mind the flying pigs. But there are investment managers, who, by employing their own brand of tactics, have produced consistent earnings for their clients. Often they will be managers who do not follow the herd, and who are not afraid to fail.
Barclays Capital Equity Gilt study for 2010 says the surplus of global savings over the past decade was responsible for capital imbalances which led to the volatile bubbles and busts. Worryingly, it warns that this surplus capital, could be followed for the next decade by capital shortages, which could see lower asset valuations still.
It believes nevertheless that profits will be made in equities, but not, one suspects, by all.
Teresa Hunter is personal finance editor of Scotland on Sunday