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Long live Buy, Hold and Rebalance

posted Nov 22, 2010, 8:27 AM by Sam McPherson
There has been much written in the wake of the financial crisis that the tried and true investment strategy of buying, holding and rebalancing no longer makes sense in the new world of robotic trading and volatile markets.  I was heartened to read the opinion piece by Burton G. Malkiel in the Wall Street Journal of Nov. 18, 2010 in which he puts forth the case for this simple investment strategy that does little to earn advisory fees, but does a great deal to improve a long term investor's chance of earning a reasonable return on his money.

Mr. Malkiel illustrated that a portfolio invested in well-diversified index funds with annual re-balancing starting on January 1, 2000 would have been almost 92% higher on December 31, 2009.  This is roughly a 6.5% average annual return during a time period including two severe bear markets.  If the investor had consistently added small amounts to the portfolio over this time period, the results would have been even better.  This is a strategy known as dollar-cost averaging.

Mr. Malkiel is a professor of economics at Princeton University.  I believe he knows what he is talking about.  Does the average investor really need an actively managed investment portfolio?  The active manager will attempt to convince you his strategy will beat the market but low-cost index funds regularly outperform actively managed funds over the long term.  Stop giving your money away.  Get smart and realize that the patient investor with the long view and a low-cost diversified investment strategy will prevail in the end.