My research suggests that while "buy and hold" investing may produce decent results if you've got the ability and inner conviction to ride out the multi-year droughts, you can achieve significantly better results by taking the time to a) follow the trends in different categories of funds and b) make periodic adjustments to reflect those trends.
During the stock slide of this spring and early summer, there were virtually no mainstream categories of stock funds that showed positive trends. So do any categories of stock funds look more appealing now?
Large-cap stocks are now back to about where they were in mid-July. (The S&P 500, for example, closed at 901 on July 16th; it closed at nearly 910 on Nov. 15, 4 months later). Although the halt to the sharp downward trend of the March through mid-July period offers the promise of a change, it is still a little early, in our view, to call the leveling out a reliable indicator of a new uptrend.
Now look at the performance of the growth vs value segments of the S&P 500, as represented by the Vanguard Growth Index Fund (VIGRX) and the Vanguard Value Index Fund (VIVAX) since July 16th:
This indicates that over the last 4 months, while the value component of the S&P 500 has continued to flounder, the growth component has become positive.
The same advantage in favor of growth can be found for small stocks in the Russell 2000 although the overall index has continued down from 407 on July 16th to 386 on Nov. 15th. Thus, growth performance, as represented by the Vanguard Small-Cap Growth Index Fund (VISGX), is actually up while a value measure, as represented by the Vanguard Small-Cap Value Index Fund (VISVX), is significantly down:
And although both growth and value stocks have underperformed their long term averages over the last 5 years, growth stocks have underperformed to a somewhat greater extent. This too would appear to modestly favor growth investments in the years ahead since trends tend to reverse themselves after multi-year periods have elapsed. Due to the still short-term nature of the above possible performance shift, we recommend that you only slowly increase your growth investments until it can be seen whether a longer-term shift can be more clearly established.
For the last several years, we correctly told our readers that value funds should be a significant part of a good performing portfolio while many investors, to the contrary, registered huge loses by sticking only to growth funds (see, for example, my site Newsletter from Oct. 1, 2000.) The above data now suggest that funds emphasizing growth may become a better bet going forward than those emphasizing value.