Buy and hold investment is a type of investment philosophy adopted by millions of investors worldwide. It consists of buying shares of companies and holding these shares for decades ahead while companies remain good, keeping constant profits and other balanced indicators such as debt, free cash flow, market share, ROE, gross margin, just to exemplify.
Choosing a way to invest and follow the plan is so much better than just changing what you want to do every day, every week or every month, and just like a silly cockroach with millions of information and news available all the time.
In the US a very widespread philosophy currently is to buy ETF passive index funds to invest in hundreds of companies at a time and so keep up with the market and lower your total risk of investing in only a few companies.
To better understand the Buy and Hold philosophy I suggest reading the book below:
In this book, the author analyzes various scholarships and various economies around the world for the last 200 years. And he generated this famous chart that shows that stocks are the best investment in the long run:
The result is that the SP500 yielded annualized 6.7% above US inflation in a series since 1802. Unfortunately, the author did not put real estate in this image, but I believe it was very little above inflation. You see, an investment that yields it above inflation annually in a long series is an excellent result, in my view (considering the reinvestment of dividends).
Of course you will not invest for 200 years because you will die well before, but I believe that starting at age 30 and investing until age 70, you have 40 years of investments that at this rate will result in a sufficient amount perhaps for you to retire quietly and Still leave an inheritance for your family.
This table above shows only the return of the SP500 index in the USA.
Let’s see it better comparing with other things to invest, remembering that the average investor is that person without defined investment philosophy, who makes many purchases and sales, enters and leaves companies constantly, leaves the market, goes back to the market, tries to correct the timing of stocks and bonds and is always “moving”.
A curiosity that I noticed in this chart was that REITS had a higher return than the SP500 in the analyzed period, with Energy and Health Care being the two biggest returns and gold having almost 6% of valuation per year, remembering that the price of gold is the same worldwide.
In the US we have many industry ETFs, I do not consider them as passive index funds, and they have very volatile returns as shown below, so I do not like the strategy of investing in industry ETFs.
ETF does not always follow a passive index, and they have made ETF for everything, remember that ETF has also become a trillion industry, but not for that you have to buy the crude thing.
And what did the Buffet say about the amateur investor?
Buffett told you to put 10% cash (as our SELIC LFT from TD) and 90% in stocks, especially if you are new and have many decades of life ahead, since pension funds, active funds, multimarket, funds Banks etc eat all your incomes with huge fees.
Cool Frugal, but I still do not understand why you invest in CSPX and IWDA that do not pay dividends.
Friends, I want to see is the cake grow, I do not need money now, I want that money up front to help pay my bills when I can have the pleasure and happiness to slow down my work, dividends will now lose the capitalization of time and compound interest, see this figure:
Without reinvesting the dividends, you will not get anywhere, so at the beginning, you will either get paid or not, you will have to play them in the same way, and worse still be paying taxes to receive dividends, that’s why I like Irish accumulation ETFs like CSPX and IWDA.
Another way to diversify your portfolio outside the SP500, MSCI World or VTI is to buy other types of ETFs, such as small caps, they have high volatility, but they seem to bring a larger return, which can temper your Wallet and even I showed it in the post “Permanent portfolio for the Buy and holder, I think a valid strategy also:
To search these ETFs here goes the codes in the US Vanguard:
Already in Ireland, we have the following for small caps:
Of these, I found interesting to CUSS and CUKS, but see that the rate is not cheap.
Another important thing is this image below:
See the age on the X axis, you have to always invest in yourself, your work and your knowledge, always, it is your biggest investment, much better than anything else, nothing will pay you more than earning more. Stay up there in the red graph line, ALWAYS INCREASING YOUR HUMAN CAPITAL.
If you stop in time you will fall on the black line and get poor. When someone asks me the best investment I answer:
INVEST IN YOURSELF, IT’S MUCH BETTER THAN INVESTING IN THE COMPANY OF OTHERS.
True truth, if it were not my last 30 years of investing in myself for a lot of work and a lot of studies I would not be here.
Now speaking a little about Brazil:
The São Paulo stock exchange has a return similar to the SP500, I said this in the post “86 years of stock” despite having a higher risk.
Hence you ask: the book is American, is this all worth the US, and Brazil?
Well, the news for Brazil is even better, Buy and Hold with companies in Brazil is proving to be more profitable.
See the study below by a user on Bastter.com and posted there:
In this study he started by depositing $ 1,000 a month in each share, CDI, SELIC, Ibovespa and SP500 also to compare until 2017, so we have 27 years of study here, see how FIXED INCOME ate dust from a portfolio with good companies not so good too, CDI and SELIC even lost to Klabin, Gerdau, and CEMIG that I consider bad companies to be a partner.
That is why Barsi and many others say that “Fixed Income is Fixed Loss”. Although I think that shares are also a better investment than fixed income, I do not think it is worth staying out of fixed income in Brazil, since it has a function of decreasing the risk of your portfolio and still serves as cash and reserve of the disadvantage of being pegged to the currency and not to real assets.
The criticism of the study is that there are companies that have managed to survive this time and some have had spectacular results like Itaú, Ambev, and Lojas Americanas, but also have bad companies. You see, I always say here that it is easy to choose good companies in bovespa to be a partner, and it is also very easy not to buy bad companies, bankruptcies, and obvious bombs. A very diversified portfolio in companies in Brazil will certainly earn very easily from Fixed Income in Brazil.
I showed you two successful cases: investing in a long-term US passive index fund (buying CSPX for example) and investing in your own stock portfolio in Brazil (which is what I do too).
Okay, now let’s zoom in a bit more and let’s go to the developed world:
Picking up since the 70’s, see how the crisis that generates panics in the stock markets and the news to sell newspaper are erased with time and the market always ends up:
I picked up on Google Finance the last 7 years of the MSCI World Index which is followed by the Irish ETF traded on the London Stock Exchange, up 81% in 7 years:
But how is this MSCI index formed?
Large and midcaps in 23 developed countries with more than 1654 companies.
In this graph, we see the results since 2001.
See the emerging markets index rose for much more, but at the cost of much higher volatility.
Note also in the fundamentals how is the P / E and PB of each index at the end of 2016, the dividend yield is very similar between them.
It also has the annualized since 1994 to compare:
Realize that the IWDA gave an income much like the SP500 but with a much lower risk.
This leads to the concept of “Efficient Frontier” that measures the risk and return of different investments and directs you not to take unnecessary risks for a return equal to or worse than those who have a better risk.
See the figure below:
Note that for the 30-year period, the risk decreases as you have more stock in your portfolio.
Hence the brilliant statement of the Siegel (but which the herd thinks to the contrary):
THE MORE CONSERVATIVE THE INVESTOR, THE GREATER THEIR ALLOCATION IN SHARES.
Brokers, banks, and analysts say the opposite, they call it “aggressive” who wants to allocate more in stocks. It’s because? Do you think they make more money from you by selling Fixed Income, Treasury Direct (government bonds and bills), or by selling stocks?
The real thing is that classic BUY AND HOLD DOES NOT GIVE MONEY TO ANY INTERMEDIARY, AND GIVES VERY LITTLE TO GOVERNMENT.
That is why,
But as well, explain better:
Look at this last line-up here:
1 – You will only pay tax up front if you SELL the asset. If you do not sell, do not pay. So you can put off paying the tax for many decades or die without paying.
2 – According to the efficient frontier, after 10 years the risk-to-return ratio gets better on your side if you have more actions.
3 – Low administration fee. The CSPX ETF has a rate of 0.07%, the IWDA has a rate of 0.2%.
Buying an FI in Brazil will be at a rate of at least 0.3% that bovespa charges, plus the custody rate of your brokerage firm. And as for taxes, A MATTER ASSET MANAGEMENT FEE YES, AND MUCH!
The management fee of a real estate fund in Brazil can be between 1 and 2% per year. You see the impact this will have in the long run. At a rate of 1% a year, in 10 years they ate 10% of the fund’s assets.
So I do not think it’s worth leaving more than 15% of my equity in real estate funds. Multimarket funds so, I’m out!
See below the impact of long-term management fees:
In 30 years, the difference between a management fee of 0.25% to 0.9% was almost U$100,000 – Impressive not? Imagine a rate of 2%.
Taxes, administration fees, and asset allocation.
These three things have to be very well thought out in building your equity.
Be very careful with that.
To further study buy and hold read the Siegel book quoted in this post.