By Robert Folsom
Millions of people follow the major U.S. stock indexes each day. That simple fact duly observed, allow me to pose this question:
Why?
It may seem breathtakingly stupid for me to ask such a thing, given that the answer appears blatantly obvious:
People follow the stock indexes to gauge how their (or someone else's) investments are doing.
Right?
After all, half the households in America own equities via 401k accounts, mutual funds, IRAs, common stocks, etc., etc. Whatever the vehicle, people who own equities get in for "the long term." The "rational" advice of nearly all financial "experts" is for people to "buy and hold" in bull and bear markets. So that's exactly what investors do.
Right?
If you believe that, dear reader, then have I got a Biscayne Bay condo for you. The experts may well drivel on about how people should "buy & hold for the long run," but any claim that most investors actually do so during both bull and bear markets is complete rubbish.
More rubbish still is the assumption that the stock indexes reflect in any way the actual gains of equity investors themselves. Those two measures DO NOT CORRELATE.
The evidence for no such correlation is overwhelming, as is the evidence that the only market investors really hold is a BEAR market. Below is a quote and chart from this year's March issue of The Elliott Wave Financial Forecast.
"As this chart of the average holding period for a NYSE stock illustrates, investors actually turn up the hope and cling most tenaciously to their shares in bear markets .... So, the harder stocks fall, the tighter the grip of investors gets. This is a graphic depiction of Bob Prechter's phrase 'slope of hope' that keeps investors nervously eyeing, and then wistfully recalling their break-even levels as stocks continually break to new lows."
Now for the chart, but first a warning: After you see it, I can safely say that you'll never think about "buy and hold" investing in the same way again.
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