Now's the Time for Buy-and-Hold

By Matthew Hougan

I keep reading articles about how "buy-and-hold is dead." That's laughable. If there were ever a time for buy-and-hold, that time is now.

The latest salvo comes from Tom Lydon at ETF Trends. He writes:

The age-old strategy that investors have stood by, the buy-and-hold strategy, has been tested, and market players are now seeking exchange traded funds (ETFs), among other vehicles, to establish a different relationship with the market ...

The technical indicators are becoming the norm for market players and long-term investors who are no longer staying on the sidelines and watching, as the recent market volatility has left them burned.

This is a reversal of the long-term investors trend, and it's changing the investing landscape. What was once a solid, long-term investment is no longer, and the market uncertainty, mixed with economic troubles, has led the way to a new state of the "normal."

I heard a similar thing when I participated in the CFA Society of Philadelphia's annual forecasting dinner in January. Bob Pisani, the moderator, said that "buy-and-hold is dead," and a roomful of CFAs nodded in full agreement.

I like both Bob and Tom—they're smart guys who are working hard to help investors achieve better returns. And you can see where they're coming from. The S&P 500 is lower today than it was 10 years ago. It doesn't take much to realize that buying and holding the S&P 500 over the past 10 years wasn't such a great idea. But there are two major flaws with the "buy-and-hold is dead" idea.

The first is the idea that traders will do better than buy-and-hold investors. By definition, they will not. Investors as a whole own the market. For every trader who makes a good decision, there is a trader on the other side of the deal who made a bad decision. It's a zero-sum game. And since there are major costs involved in buying and selling securities, it ends up being a negative-sum game; traders (on average) under-perform buy-and-hold investors because of costs. That's just math.

If you want to be a trader, you have to assume you're smarter than the market. But before you do that, ask yourself, did you call the recent market top at Dow 15,000? Did you act on that conviction? Have you traded all the peaks and valleys successfully since then?

If you answered all of these questions "Yes," I have one more question for you: Why are you reading this column? You should be relaxing on a yacht off of St. Kitts. If you answered some of these questions "No," what makes you think you will do any better now?

But the "good trader vs. bad trader" theme is a minor issue. Here's the bigger point: Far from being dead, now is the best time in a generation to be a buy-and-hold investor.

The critics of buy-and-hold investing love to point to the fact that, after peaking in 1929, the stock market didn't regain its old highs until 1955. Their point is that the long run can be a very long run. And that's true.

But today is not 1929. We are a year and a half and 45% removed from the stock market peak in July 2007. Unless the S&P 500 is going to zero, we are a lot closer to the bottom than we are to the top.

So rather than looking at 1929, it makes more sense to look at 1932, when the market was down substantially but not yet quite at the bottom.

The table below showcases the growth of $10,000 invested in the S&P 500 for the 30 years starting in 1932. At the end of 30 years, the original $10,000 turns into $380,587. That's a 12.9% compound annual growth rate.

I'm not saying that we'll enjoy those kinds of returns for the next 30 years. They might well be lower. But the table makes the point: While 1929 was a terrible time to invest, 1932 was pretty darn good.

The traders have it wrong. The time for trading the market was the last 10 years. The time for holding the market is now.

Comments

[monday1929:]

I am as bearish as they come, and called the derivative collapse, and I agree with you. As predictable as the collapse was is that "buy and hold" would die during the bear market. At the big bottoms, EVERYONE is a trader. At the big tops, everyone is a buy and holder (but only recently became one.) The young people who could be dollar cost averaging down to S&P 200-300 (my targets) will be so disgusted by the financial crimes they have witnessed, or are jobless because of them, may NEVER invest in the Stock Market again- like the generation who missed the '50's-'60's bull market because of what they witnessed as young people during the '30's Depression.
As Robert Prechter also observed, technical analysis will become very popular. TA falls out of favor during Bull Markets as everyone believes the "positive fundamentals" are driving stock prices.
All that really drives stock prices are human emotions- abject fear and delusional optimism representing the extremes which cause massive under and over-valuations.

Feb 05 10:33 AM

[antiquary:]

I'm with you, Matt. It's true that buy-and-hold doesn't work that well if you run with the crowd, buying at the peaks, but it works unbelievably when you use the margin-of-safety approach, which we're in the middle of an ideal time for right now.

Let's remember that most people seem to be calling for the economy to start recovering toward the end of this year, and that the stock market usually sees it coming and moves six months in advance. That would make this, eight to ten months before the end of the year, the last great time to buy. For long-term investors the returns on their investments made right now will probably cornerstone all their returns for decades to come.

The problem with active trading is not that it's never possible to do it profitably, any more than it's never possible to make enormous profits on microcaps. It's that if it were possible to tell which traders (or microcaps) are the ones whose approach is perfect for the times, everyone would pile on and there wouldn't be any advantage. No one sufficiently encompasses the world's myriad factors to be able to make short-term predictions reliably, over many years. Long-term predictions are easier, but patience is boring and unsexy, which is the advantage of we buy-and-holders.

Feb 05 11:17 AM

[softomic:]

Right. Now is the time for buy and hold. I heard the same thing 10 years ago...but this time it's for real, right?

Feb 05 11:55 AM

[The Phi Group:]

So you are the guy who did not go to the beach, instead, reading here?
If you beat the market for over 20 years, you will be close to Warren Buffett. Why are you still spending time to read here is beyond me.

Buy-and-Hold: does not mean that you buy blindly, for example, intelligent investors would not blindly buy at the height of 2000, and intelligent investors would sense the housing crash coming and adjust accordingly.

I think the active management exaggerate too much about them being smart ass, while they want badly the public business to invest with them. If I were you, who can beat the market for 20 years, I would not bother to manage other people's money, I'd enjoy life.

Take it easy. There are intelligent investors in Buy-and-Holders, like Warren Buffett, and not so intelligent investors; the same is true among people like you, active managers who want to make money off their client's money, some are good, most are not worth it!


On Feb 05 08:51 AM Roger Schreiner wrote:

> This is laughable. Buy-and-Holders DO NOT have the option to say
> this is a good time to buy-and-hold, because they buy and hold.
> They CAN NOT take advantage of "these good situations."
>
> You just don't get it. Buy-and-Hold means you can't do what's best
> for yourself, you have to accept every decline, every crash, every
> drawdown, no matter how stupid you are doing it.
>
> There are so many complete myths, lies and illogical arguments in
> your article, I don't know where to begin.
>
> If you every want to do a public debate I'm the first in line.

>
>
> We are an active manager who has consistently outperformed the market
> with significantly less risk than passive investors for the last
> 20 years. We up last year, our investors are happy, and they LOVE
> active management. I could go on and on.... and would love to publicly
> debate your insane passive approach. Good luck, you're going to
> need it!

Feb 05 01:25 PM

[mikebrah:]

The foundation of this argument is erroneous. The debate is about which "style" of investing is correct, and even less about the correct time to employ one versus the other. It all comes down to the individual investor, not the style employed.

This, like all other times in history, is a time that SMART investors will do tremendously well. And dumb ones won't. The last decade was a great time to buy-and-hold...if you bought the right companies. Similarly, it was a great time to actively trade...if you are a skilled trader.

The people who NEVER do well (the dumb investors) are the ones that listen to articles like this and constantly change their approach. Helplessly drifting wherever the tide takes them.

Buffett and Carl Icahn. Two very different personalities and approaches. Both very successful. How could that be? If one "style" is superior to the other then how could both styles be simultaneously profitable?

Buy and hold requires diligence and intelligent selection of stocks. Trading requires diligence and intelligent analysis of technicals. Intelligence, diligence, and self-confidence are the central themes to successful investing, regardless of the "style" used. Personally, I think (if he wanted to) Buffet could have been a helluva trader. But through his own experience and decision making he determined that buy and hold was his style. Vice versa for Icahn.

Arguing about various "styles" is purely semantic. The individual making the decisions is all that is relevant.

MM

Feb 05 01:32 PM

[Scott's Inv...:]

I think this article misunderstands or at least misrepresents some of the basic tenants of those who offer alternative strategies to buy and hold. Tom Lydon and others, such as Mebane Faber, are not advocating a day trading strategy like the article implies. Rather, they show how using trend investing can dramatically reduce risk while matching and sometimes exceeding the long term returns of buy and hold. Their research (as well as others, such as Siegel's 'Stocks for the Long Run') shows that using a moving average strategy has performed better then buy and hold on a risk adjusted basis. Faber's paper can be found on his site (mebanefaber.com) or here:

papers.ssrn.com/sol3/p...

There has been and will continue to be years where buy and hold outperforms moving average strategies. However, in the long run ma strategies have provided better risk adjusted returns. If the average investor stays discplined and puts an action in place, then they can reduce risk and improve returns.

Feb 05 01:33 PM

[mikebrah:]

Second sentence should read "The debate about which style of investing is INCORRECT..."

Sorry
MM

Feb 05 01:35 PM

[Chris B:]

"For every trader who makes a good decision, there is a trader on the other side of the deal who made a bad decision. It's a zero-sum game. And since there are major costs involved in buying and selling securities, it ends up being a negative-sum game; traders (on average) under-perform buy-and-hold investors because of costs."

It's kind of like playing red/black or even/odd in roulette, isn't it? Among thousands of players, there's always the guy who wins 5 times in a row and attributes it to his superior cunning and skill. Try convincing him that 5 wins in a row is just as statistically probable as a L,L,L,L,L or a W,L,L,W,L pattern for example, or any other pattern! He'll surely bet the house on the next roll, because there's obviously something special about him that allows him to take money from the "dumb" players!

Something special all right - the ability to be so blinded by overconfidence that he can't understand logic or probability.

----------------------...

"The time for trading the market was the last 10 years. The time for holding the market is now."

Exactly. When has the market ever done the same thing, or rewarded the same style, for more than 10 years? Never. The same traders who would never expect a stock to go up 5% today just because it went up 5% yesterday expect the market for the next 10 years to resemble the market of the last 10 (but not the 10 before that). Good luck with hindsight investing. Better hope the investment landscape doesn't change or anything. But hey, that never happens, right?

----------------------...

"At age 69 I have five years, not thirty, but I still agree with you about buy and hold in that short time frame..."

A 69 year old probably shouldn't have more than 10% of his/her portfolio invested in stocks. If you're retired, the market can remain illogical longer than you can remain solvent. The exception would be if you had plenty of wealth set aside in fixed income to cover the rest of your life's expenses and wanted to grow a fat nest egg for your heirs. Even in that case, avoiding estate taxes by giving them gifts under IRS limits might help them more than your investing patience.

Otherwise, you're taking a big market timing risk.

Feb 05 04:57 PM

[Bartlesby:]

As of this past Monday, 244 of the S&P 500’s constituents had reported earnings, which totaled ($1.64). S&P’s senior analyst who publishes the weekly index report stated that quarterly earnings could be negative for the first time in history.

Assuming an optimistic $0.00 quarterly EPS, the index’s trailing 12-month earnings would be $38.13. As of today’s close, that puts the index’s trailing P/E at 22.18. This seems rather lofty for current economic conditions.

If we revert to the historical mean P/E of 15.8, that puts the S&P's value at roughly 603. There is much historical precedent for the index to “overshoot” in both directions when reverting to its mean valuation.

If we apply the lowest multiple realized in the last 20 years, which was 11.69 at 12/31/1988, we get a low estimate of 446.

Even if we ignore these facts and assume that we are at the bottom right now, the market would not regain its previous high of 1565 until the year 2018. (This assumes annual compounding at 8%).

Is it possible that we could have a major “relief rally” that takes us 20% higher from here? Yes, anything is possible. The more appropriate question is, “What is a more probable intermediate-term outcome given historical precedent for market valuations?”

Feb 05 06:17 PM

[mplaut:]

A traditional buy and hold strategy was oriented towards dividend income as well as price rises. If you buy high yielding stocks, you do not have to wait to be rewarded. You are paid off right away.

Feb 05 06:31 PM

[consumerons...:]

As stupid/unsophisticated as some of these people think those who choose to participate in the market as if they were buying "a piece of the business" and take advantage of the volatility caused by traders/"channel investors" that does not make either side wrong and the other side right. There are probably quite a few people who bought dividend income on sale and felt better about their last year than many who spent countless hours more on their investments and didn't do well. And there are no doubt many people who thought dividend investing would always be superior who are now getting a penny a share for their stocks in some financials. That doesn't make them wrong even though it sucks to be them. The traders who made the right trades did well, and the people who didn't have the rotten luck to choose the wrong companies to buy and hold no doubt did well too.

Feb 05 10:05 PM

[mirandaD:]

All I know is this: too many people are declaring "buy and hold is dead" for it to be the best strategy right now. Talk about contrary indicators. The masses usually are wrong.

Feb 05 10:30 PM

[econjunkie:]

If I could store a worthwhile amount of oil and base metals in my backyard, I would. Alternatively, there are ETFs. Score!

Feb 05 11:02 PM

[consumerons...:]

Seems to me like the guy touting "channel investing in that one commercial on CNBC probably has too many people thinking it sounds like a neat idea.
When too many people are trying to do it I don't think it'll work. Their "channel" will get smaller and smaller in range as they all try to "take their profits" before everybody else does - won't it? I'm just guessing. I tend to want to find something wrong with it because - you guessed it - I believe in buy and hold. I'm just glad I was too short of money when I wanted to buy some USB a few weeks ago. Sometimes it's better to be lucky than smart.

Feb 06 12:37 AM

[berated:]

Grand proclamations (eg, "buy and hold is dead") offer little value. My guiding principle has been to use the strategy that best suits the situation. In volatile times, with little short-term clarity available (the last 14-15 months for example), a trading strategy (or even an all- or majority-cash position) would be most appropriate. Once a bottom has been established (and good luck calling the bottom), a buy-and-hold strategy is most successful. To lock yourself into one or the other strategy is unnecessarily limiting.

Have I made the right choices in every case? No, I haven't. But I've done much better than letting my money slowly disappear with a buy-and-hold approach over the last year.

Feb 06 12:59 AM

[Maxe Paul:]

i agree with your comments, buy and hold is far from dead. Everyday another stock or sector hits a low, and you can clean up with very solid returns long term or even short term in this market.

People who have the guts to buy today will do well over the long term, maybe even better in the short term! In this market you can choose to accumulate stocks or trade, both is a winner IMO.

Feb 06 07:03 AM

[little_inve...:]

I think you should reconsider at least one line in your article. You say:

We are a year and a half and 45% removed from the stock market peak in July 2007.

Perhaps you should say:

We are nine years and 45% removed from the stock market peak in March 2000.

Feb 06 01:35 PM

[Scott's Inv...:]

Time the Market, Buy and Hold!!

[hyperlinks available on my site]

I read a recent Seeking Alpha article by Matthew Hougan of IndexUniverse.com that was, to borrow a phrase from Mr. Hougan, 'laughable'. The inherent contradiction in the article is clear: Hougan declares that 'if there were ever a time for buy-and-hold, that time is now'. Hougan states that 'Far from being dead, now is the best time in a generation to be a buy-and-hold investor.' Just to summarize, while he scoffs at the idea that any active trading strategy could provide superior alpha to buy-and-hold for the average investor, he is encouraging his readers to do the one thing he scoffs at and which is completely contradictory to a 'buy and hold' mantra: he wants us to time the market by buying and holding right now.

Apparently Matt is covinced now is the bottom of the market? It just can't get any worse, can it?? It very well could be the bottom of the market and the point here is not to debate that, but he sure seems absolute in his conviction by declaring now the best time to buy and hold. One question, then, for Matt: if the bottom is so certain in Matt's eyes: 'Why are you reading this column? You should be relaxing on a yacht off of St. Kitts.' Leverage up, refinance, take cash advances, play the futures market, buy-buy-buy, hold, sit back, and relax Matt. I'm sure that you've been out of the market the last 10 years since you've declared now the best time to buy and hold (clearly you've been waiting for this moment since previous moments could not, by definition, be 'the best'?). The point is not to debate whether we are at the market bottom because I do not know and neither does Matt. We very well could be, or we could see the S&P go to 600 or lower. The point is that there are tangible, documented strategies with low turnover that have superior risk-adjusted returns to buy and hold and I will provide links for further research on one such strategy. That is not to say there aren't many other good strategies, but since Matt brought up Tom Lydon I though it would only be fair to focus on one alternative, the moving average system.

Beyond the obvious contradiction, however, in Matt's article there are other obvious oversights or just gross misrepresentations of alternative investment strategies. For starters, he quotes Tom Lydon extensively. The implication in the rest of the article is that Lydon is somehow associated with active trading strategies that average investors could never hope to succeed at. I'm not sure if Hougan is familiar with Lydon's website or strategy (actually, it is clear from the article that he is not or he just chose not represent them accurately), but Lydon lays his trend system out fairly clearly on his site. The strategy is far from a daytrading strategy that will leech returns with high turnover as Matt implies.

To give Matt some credit, though, I'm sure there are millions of Americans who can heed his advice “to time the market, buy now, and hold! Trust us this time! We're really sorry about 2008! I'll let you know next time when to sell, promise!” After all, his primary concern is with the average investor who should be using their piles of cash to buy and hold: the recent college graduate who just got a high paying job in the world of finance (um, on second thought Mom and Dad I'm going to take a year off to travel), the 40 year old factory worker whose job and 401(k) has never been safer (er, honey, I got some bad news from the plant today...), the real estate owner who can dip into the equity of their home to purchase stock (my house is worth what?!), and of course the early stage retiree who lost 20-30% in their 'moderate' buy and hold portfolio (constructed by large financial institutions who came to prominence in the last 20 years by forgetting that risk still exists, but that is a whole other discussion) and who if he or she loses another 20-30% will soon have to go back to work. Now that I think about it, the only 'average' investors who have the cash to heed Matt's advice and pile into the market or those who weren't in the market last year and were sitting on the sidelines. How dare they time the market!!

For Matt and othe readers I would advise doing some research on alternative strategies before grossly misrepresenting those alternatives. Start by reading Mebane Faber's blog and article (he will be issuing an updated version of the paper in the next couple of weeks). Three points in Faber's article I'll highlight here: the point is not just to 'time the market' but even more important is a diversified portfolio (which I'm sure Matt and I would agree on). Secondly, from 1900-2005, his very basic timing model on the S&P 500 had a compound annual growth rate of 10.66% with stdev of 15.38% and a sharpe raio of .43. The S&P 500 had CAGR of 9.75% with a standard deviation of 19.91% and a sharpe of .29. Thirdly, from 1972-2005 his timing strategy had an average of .59 roundtrip trades per year in the S&P 500, something I'm sure Matt may find surprising.

In addition to Faber, check out Tom Lydon's strategy and research done by Blackstar Funds. The site dshort.com does a great job of monitoring moving averages and I would also advise reading their article 'The Rational for Moving Averages' which discusses the effect of serial correlation in moving average signals using data as far back as the 19th century (take note of how little the serial correlations have changed the last 130 years). Jeremy Siegel in his book Stocks for the Long Run discusses using a 200 day moving average strategy on the DJIA as a way to reduce risk: 'the major gain of the timing strategy is a reduction in risk. Since you are in the market less than two-thirds of the time, the standard deviation of returns is reduced by about one-quarter. This means that on a risk-adjusted basis the return on the 200-day moving average strategy is quite impressive.' The site Fundadvice.com has several articles detailing moving average strategies they use for clients (in addition to buy and hold). These are just a few resources to get one's research started and I don't intend it to be a comprehensive list.

Let me be clear on two points: Buy and hold as a strategy will outperform moving average trend systems in certain years on a nominal basis and vice versa. However, the evidence is apparent that low turnover moving average strategies will have comparable returns over the long run (and in some cases better returns) while significantly reducing risk. Surely this is a strategy Hougan should applaud if he is concered about the 'average' investor. The primary flaw with him declaring 'now is the time to buy and hold' is that we are at his mercy to declare some day in the future 'the market is oversold, buy and hold will underperform, sell!' In essence, Matt wants us to time the market based on his advice (and of course, to watch the expense ratios of the funds we purchase – in 2008 we could have turned that 39% loss into a 38.5% loss if only we had chosen lower expense ETFs, damn it!). I for one, would rather stick to a more discplined strategy while reducing risk. Secondly, I would like to say that I applaud the work of IndexUniverse.com, there is much on their site worthwhile so please check it out. However, I know that investors-and Matt-can do better.

Feb 09 09:07 PM

[rational in...:]

Robert Scheiner...last time I checked, I never saw your name among the investment legends: Graham, Buffet, Munger, Lynch, Danoff...etc..Uh, may you are a legend in your own mind. Buy and hold is not buy a stock and sit. It includes asset allocation, rebalancing, weighting, and many other investment strategies. It does, however, imply staying in the market over time, and not being a "market timer." In the end, most market timers get their head handed to them. Today, everybody is going
to be a "trader and timer" now. Watching cbnc for all the latest tips. Ok, let the professonals hand you your head also. Dot-com daytraders in the
basement losing their homes, people buying homes specing on an equity gain to bail them out before the balloon payment, and all the new
"traders and timers" who have a crystal ball and can see into the future.
Have fun donating...there are plenty of professionals who will gladly take your money. No, I am not a stock trader, spent 15 years trading commodity markets..same-same...c... change..see you around...Rational Investor...


On Feb 05 01:25 PM The Phi Group wrote:

> So you are the guy who did not go to the beach, instead, reading
> here?
> If you beat the market for over 20 years, you will be close to Warren
> Buffett. Why are you still spending time to read here is beyond me.
>
>
> Buy-and-Hold: does not mean that you buy blindly, for example, intelligent
> investors would not blindly buy at the height of 2000, and intelligent
> investors would sense the housing crash coming and adjust accordingly.
>
>
> I think the active management exaggerate too much about them being
> smart ass, while they want badly the public business to invest with
> them. If I were you, who can beat the market for 20 years, I would
> not bother to manage other people's money, I'd enjoy life.
>
> Take it easy. There are intelligent investors in Buy-and-Holders,
> like Warren Buffett, and not so intelligent investors; the same is
> true among people like you, active managers who want to make money
> off their client's money, some are good, most are not worth it!<br/>

Feb 17 12:35 AM

[Esward Gold...:]

BUY, SELL, HOLD recommendations can change over the time. Analyst should be dynamic enough to provide these recommendations timely. You can also watch the performance of the recommendations at: gainerstoday.com

Apr 29 03:07 PM