Lesson From the Crash of 1987: Buy-and-Hold Investing Works

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.

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.

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