'Buy and Hold' Is Dead? I Think Not!

I find it rather amusing that six weeks of a horrendous market can lead so many people to declare that a "buy and hold" investment strategy is no longer viable. The evidence for such a claim is quite unimpressive, in my view. They assert that people who invested in the broad U.S. equity ten years have lost money so far, so "buy and hold" doesn't work.

Seriously? Yes, if you made a lump sum index fund investment in November 1998, waited a decade, never invested another penny, and sold today, you would have lost money over that time. "You would have made more by putting your money in the bank!" True again, but none of these arguments are very convincing. Let me explain why.

The stock market in the late 1990s traded at the highest valuation ever recorded. That was not a good time to invest in the market with only a lump sum. Conversely, today stocks are trading at the lowest relative valuation since the early 1980s. Those who use the last decade as evidence that "buy and hold" does not work anymore are simply telling us that buying high and selling low is a losing strategy. We already know that.

How many investors invested a lump sum in the late 1990s, never added to their investment, and sold recently? I don't doubt that some people did that (because they traded on emotion, not analysis) but to conclude that those few instances prove that a long term passive investment strategy is a bad idea is nonsense.

One way to avoid buying high and selling low is by dollar cost averaging into the market by adding to one's investments over time. 401(k) investors contribute a certain percentage of their income to their plans in equal (typically bi-weekly) amounts. Other investors try to max out an IRA every year to ensure they are always adding to their investments in order to build wealth faster over time. For people who follow those investment principles, even if they choose an index fund rather than active portfolio management, the fact that the market trades lower today than it did in November 1998 is irrelevant.

People are misguided if they believe they will always get rich by investing a lump sum of money in the market, regardless of price, by not following the investment or adding to it over time. Just because some investors have learned that lesson the hard way, it certainly does not mean we should proclaim that "buy and hold" is dead.

One final point. Unlike ten years ago, stocks today are quite cheap on a historical basis. As a result, I would be willing to bet that ten years from now the market will be meaningfully higher than it is today. Ironically, naysayers are out there advising people against doing just that.

Comments

[Steven Hansen:]

hindsight is not why "buy and hold" is dead for some investors.

- there is no long term economic forecast anyone is willing to make. long term is a five year window. i personally think it will not be good and i hope i am wrong.

- the market is not acting on fundamentals. there are players in the market causing a lot of volatility.

- the p/e's are no better than 6 months ago if you consider that profit guidance taking into consideration a deep recession is still to be given. most guidance to date has been given using rose colored glasses.

- we have a changing of the guard. most want to see what will happen.

- we are in a bear market. if historical timeframes of bear markets are active, we will leave it early next decade. there is no hurry to jump in.

- the baby boom investors (and the group which probably has the most money) have been stung by the triple bubbles of equities, commodities, and real estate. this group will be extremely careful in jumping back in as another market decline will probably doom any chance of retirement.

- with the exception of low commodity prices, it is all bad news. and the commodity pumpers are out there saying commodities will be rising. in fact, it is almost like a carnival with respected individuals barking out this is the time to buy equities, commodities, real estate - you name it. there is a lot of disinformation out there.

- the government and industry is operating behind closed doors. the ability to view what is happening is unsettling. it is one thing for this to happen in a bull market where you can even make money on GM, but it is another thing for this to happen in a bear market while economic chaos is occurring.

i hope others can add to this list.

2008 Nov 14 04:19 AM

[Dean M:]

If it's not dead, it's certainly on the ropes

2008 Nov 14 09:31 AM

[Smarty_Pants:]

Bull market = Buy and Hold

Bear market = Sell and Wait

Currently in Bear Market:

Sell should have already happened and Wait is the current recommendation.

Buy and Hold isn't completely dead, it's just not the proper strategy at this point in time.

2008 Nov 14 11:11 AM

[CLH:]

For the ordinary investor buy and hold is always the best. Few can sell and not buy back at a higher price. Those who are playing the present volatility --most all are losing big time --even the Fast Money boys.

2008 Nov 14 11:36 AM

[jepittman:]

Portfolios should be living, breathing things. They should be cultivated like a garden. Carefully pruned, fertilized, watered, and yes, occasionally pulling up parts by the roots. A static portfolio will grow weeds. However I see where the author is going. Owning high quality companies over long periods of time and ignoring the short term wiggles is a proven route to building wealth over time. Unfortunately times such as now severly test it. It is also unfortunate that so many fail the tests.

2008 Nov 14 01:37 PM

[kurt walter:]

Buy and hold for 1 day is alive and trading well.

2008 Nov 14 02:28 PM

[robert.b.fe...:]

Very concise and spot on. Those baby boomers who are closer than five years to their projected retirement should have already moved the bulk of their money into cash assets like CDs and tax exempt bonds. For those of us with a longer event horizon say twelve to fifteen years this presents a buying opportunity. Until seven years ago I was not invested in the maeket other than small stakes in Metlife (MET) and Principle Financial Group (PFG) which languished for years in trusts. I started a Roth IRA at Pioneer (PINDX) as I was retiring from the military. When I started on my second career I began contributing to a Roth 401K and saving small quantities of cash every pay day in a money market account. Last June I moved my stocks to a USAA brokerage account with a tax exempt money market account and moved my cash reserves into it. I've been purchasing positions and adding to them ever since and using dividends for repurchase I expect that I will have recovered all of my losses and have substantial gains which I will move into cash assets in ten or twelve years.

2008 Nov 14 05:06 PM

[Crashnburn:]

I bought into the market in March, 2003, just after the bottom. I had a diversified portfolio. As some positions became overweighted, and started to decline, I sold the excess. As underweighted positions started to gain, I put enough into them to bring them up to target weight. I fine-tuned the holdings themselves over the years, and in Sept. I realized that my 10% annualized returns weren't going to get me rich enough to retire when I wanted to, so I worked up a more aggressive portfolio, and sold everything I owned, just before the financial panic hit the country.

I now have a less aggressive portfolio planned, but I'm currently waiting for my target positions to show some signs of positive momentum, so I'm sitting on the sidelines and advising those who ask who still have money in the market not to lock in their loses.

I had no idea the market was going to tank in Sept. If I had, I would have bought all the Ultra Short funds I could afford, Actually, I wouldn't have, I've tried short funds before, and couldn't wait to get out of them.

2008 Nov 14 07:21 PM