The annual study of the investing public conducted by Dalbar® provides significant insight to what should be learned from the 2008 market meltdown.
Study results are challenging the traditional use of Modern Portfolio Theory. "Investment results in 2008 showed clearly that correlation of asset classes varied unpredictably and with no warning. This brings into question the very basis for MPT and its ability to forecast an efficient frontier. MPT simply cannot be used in isolation. Instead it should be thought of as only one reference point for modeling the behavior of a potential portfolio. It is only one dimension of a more comprehensive investment-management process."
Stocks for the Long Run has supported the “Buy & Hold” investing mantra ever since its publication. In a rising bull market, “buying on the dips” quickly erased losses from being a little too early in the dip. If examining the Japanese stock market instead of ours, the outcome would be different. Why should you care? The state of our government's finances and the solutions for a slowing economy are too similar to ignore. It was the world’s largest stock market twenty years ago. Not to be ignored, it is still the world’s second largest economy right behind the USA.
Regardless, Japanese investors have been experiencing a bear market since the 1989 peak. Buying and holding on - HOPING – has led to substantial and probably permanent losses. In Japan's 20 year bear market, there have been five major advances lasting roughly six months to more than four years. Index returns during those advances ranged from 34% to 135% for investors who adapted to changing economics and markets. “Buy and Hold” investors continue giving up their gains – a high cost for holding on.