Lesson From the Crash of 1987: Buy-and-Hold Investing Works
Had you bought into the stock market immediately before Black Monday, you'd still have earned nearly 9% a year along the way.
Who says buy and hold investing is dead?
With today being the 25th anniversary of Black Monday -- the day the Dow Jones industrial average fell 508 points, or 22.6% (the equivalent of a 3,000-point drop today) -- I wondered how well (or badly) you would have done if you had bought stocks on the Friday before the crash and held them over all these years. So I checked the return for Vanguard 500 Index (symbol VFINX), an index fund that tracks the U.S. stock market, from Friday, October 16, 1987, through October 18, 2012.
If you had bought that Friday, you suffered not only through the 1987 crash, but also a 20% bear market decline in 1990, a 48% tumble in 2000-02, a catastrophic 55% drop in 2007-09 and a drop of nearly 20% last year. Despite all of that, the annualized total return, including reinvested dividends, for the Vanguard 500 Index fund over the past 25 years is 8.9% (the chart below is based on closing prices, not total return, but demonstrates the volatile ride since 1987). If you had invested the $3,000 minimum on October 16, 1987, in your IRA (and thus not had to worry about taxes), your stake would be worth roughly $25,280 today.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You may not get 8.9% a year over the next 25 years, but you'll stand a good chance of earning more than the inflation rate, and your stock holdings will almost certainly do better than bonds, which because of today's ultra-low yields are destined to deliver sub-par results in coming years. The bottom line is that if you have a long time horizon, stocks really are the best choice for most investors. You just have to have the intestinal fortitude to ride out those big declines, which occur regularly and can occasionally be gut-wrenchingly steep.
Subscribe to Manny Schiffres on Facebook for his latest commentary on investing (and baseball).
Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Subscribe now!
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published
-
Stock Market Today: Stocks Stabilize After Powell's Rate-Cut Warning
The main indexes temporarily tumbled after Fed Chair Powell said interest rates could stay higher for longer.
By Karee Venema Published
-
Stock Market Today: Stocks Reverse Lower as Treasury Yields Spike
A good-news-is-bad-news retail sales report lowered rate-cut expectations and caused government bond yields to surge.
By Karee Venema Last updated
-
Stock Market Today: Nasdaq Leads as Magnificent 7 Stocks Rise
Strength in several mega-cap tech and communication services stocks kept the main indexes higher Thursday.
By Karee Venema Published
-
Stock Market Today: Stocks Tumble After a Hot Inflation Print
Equities retreated after inflation data called the Fed's rate-cut plans into question.
By Dan Burrows Published
-
Stock Market Today: Stocks End Mixed Ahead of Key Inflation Reading
Equities struggled before tomorrow's big Consumer Price Index report.
By Dan Burrows Published
-
Stock Market Today: Stocks Closed Mixed in Choppy Trading
Volatility returned as market participants adjusted their expectations for rate cuts.
By Dan Burrows Published