After Market's Lost Decade, Now What?

As the curtain falls on the single worst decade ever for stocks -- a 10-year-period in which shares basically went nowhere -- professional money managers and academics remain wedded to buy-and-hold investing.

From the moment most individuals set up their first brokerage accounts and retirement funds, professional advisors stress the importance of taking a long-term view.

But does the buy-and-hold approach really make sense?

"While the last decade certainly was not a rosy one for stocks, it's still hard to find another asset class that offers investors a better alternative, as far as yield over Treasuries," said William Goetzmann, a Yale School of Management finance professor who has studied New York Stock Exchange-listed companies' share prices going back to the earliest recorded data, nearly 200 years ago.

VIDEO: Smart Investing TipsPlay

From the end of 1999 through last week, no calendar decade, even the 1930s, had produced a worse return (-0.5 percent) than the decade about to conclude, according to Goetzmann, whose research was featured in a Wall Street Journal story last week.

"Even a 10-year period like the one we just came out of still is not enough to refute more than 100 years of equity market price history," insisted Jim Swanson, chief investment strategist at MFS Investment Management, an 85-year-old Boston-based money management firm with $181 billion in assets. "In other words, the market tends to reassert itself over time. So while 10 years may seem like a long-term period you really have to take even a longer view."

Some money managers now fear that after the lost decade for stocks, individuals, believing bonds or gold are a better bet, are setting themselves up for a dismal decade to come.

Trillions at Stake

Americans currently hold around $14 trillion in retirement assets, about half of which is in IRAs or employer-sponsored 401(k) plans, according to the Investment Company Institute, a Washington, D.C.-based mutual fund industry lobbying organization.

Education Needed

Clearly, whether a person runs toward or away from stocks depends on their individual risk tolerance levels and their age, although considering the volatile conditions of 2008-2009 possibly only teens are the last demographic group left suitable for a multi-decade horizon.

A person nearing retirement age may feel like fixed-rate bank CDs are their last best hope; a person now in his or her early 30s who may have started a retirement account 10 years ago has to wonder, even with the market staging a bit of a comeback in 2009 (the Dow, up 20 percent this year, would have had to have gained around 47 percent to fully make up for losses in 2008) how much more dismal can stock investing get?

Buy and hold, by virtue of its inherent path-of-least-resistance bent, matches up well with individual investors who are either disengaged from their financial situation or overwhelmed by it.

"There is a real need in this country to get people better educated in all things financially related, especially retirement investing," says John Gannon, president of the FINRA Investor Education Foundation.

A recent survey by the foundation found that fewer than half of 1,400 Americans surveyed correctly answered two basic questions about how interest rates and inflation work. Around 60 percent had not set aside money for their children's college education. More than one quarter of respondents indicated that their risk tolerance was zero.

While understandable, this concerns Gannon "because if there is one thing people need to know about investing for retirement it's that you really have to take some form of risk," he said. Otherwise, you are not going to reach your goals, Gannon stressed, adding that buy and hold is for the most part the most appropriate form of investing for individuals.

When the market tanked in 2008 it is estimated that $10 trillion was lost in the U.S. alone, much of that endured by ordinary buy and hold investors who felt they had no choice but to ride out the storm. Approximately 50 million American households invest in mutual funds, or around 40 percent of all households, according to research done by the Investment Company Institute. More than two-thirds of fund-owning households bought their first fund shares in 2000 or later, the ICI said. Equity (stock) funds are the most commonly owned type of fund owned by households, with 77 percent of households owning shares in one. In recent months, money has been flowing out of stock funds and into bond funds. Nearly $2 billion has fled stock funds this year, according to the ICI.

MFS's Swanson said that people should still have a long-term view but at the same time take some proactive interests in their portfolios.

"The approach I would advocate is buy, hold, tweak, rebalance, reassess," he explained.

Active, professional traders agree that for the average individual, buy, hold, assess, is a suitable approach, though the idea that one can't time the market should be not automatically be assumed as gospel truth.

"The S&P 500 is up roughly 25 percent on the year," noted Scott Redler, cofounder of Manhattan-based trading firm T3 Capital. "But it is down roughly 25 percent on the decade, which tells me that you have to time the market."

"I'm not suggesting most people become active traders but at the same time you can't just sit back and let someone else handle all of your investment decisions. There are way too many resources available nowadays. Never has there been a better time for people to empower themselves."

Few companies have benefited from the pervasiveness of buy and hold more than mutual fund giant Vanguard, a staple of retirement plan offerings due to its low fee-funds. The Valley Forge, Pa.-based money manager has $1.3 trillion in U.S. fund assets mainly in vehicles that mimic stock indexes such as the S&P 500.

Sandip Bhagat, head of equities at Vanguard, has a problem with calling this past decade a lost decade for stocks. "Look at the vulnerability of the starting point," he said. "The end of 1999 was an incredibly lofty period in the history of stocks in terms of valuations, so right off the bat, expectations for the decade to follow would have been out of whack."

There is room for both active and passive management, said Bhagat. "From a general strategic asset allocation standpoint, people should still feel comfortable sticking with a long-term view that stocks are a viable investment, say, for moderately aggressive investors, around 60 percent of the portfolio. Now, that said, there is room to make some adjustments based on the market conditions. That is perfectly viable. But to try and time the market is next to impossible."