Understanding What Buy and Hold Really Means

Have you ever noticed those that most vehemently attack a buy-and-hold strategy really don’t understand how buy-and-hold works? They confuse a buy-and-hold strategy with day-trading for a longer duration.

Case in point, the Forbes article Buy-And-Hold In Disrepute by Robert Lenzner. He tries to tie the buy-and-hold strategy to a risky BRIC (Brazil, Russia, India and China) investment:

They lost even more in Russia and other emerging markets–to the tune of 70% or more–if they bought into the “BRIC” investing concept promoted hard by Goldman Sachs (GS) in the early part of the decade. You needed to buy and sell, not buy and hold. If you bought and held, you had the pleasure of the run-up followed by the pain of the collapse.

A true implementation of buy-and-hold would include a reasonable asset allocation framework in which emerging markets would never command anything more than a small percentage of total invested assets. Since, the individuals investing their hard-earned money should not be responsible in any way, who can we blame Mr. Lenzner?

The truth is that the public was badly served by its investment advisers, like Alliance Bernstein, or their big public mutual funds, which stayed 100% invested all through the lead-up to the worst financial crisis since the 1930s. They took little or no money off the table. They never called your Aunt Sadie to advise her to take profits in 2006 and 2007 before the bottom dropped out.

So, the brilliant investment advisers should immediately sell as the investment peaks, then buy back in as it hits bottom? I thought we were talking about buy-and-hold. This sounds a lot like market timing.

Investors beware: You have to watch over your money like hawks, read your monthly statements and ask questions. You must be active, not passive, when dealing with commoditized investment firms…

Finally, we agree on something. Maybe I should stop reading on that high note.

Were you told to sell your General Electric (GE) or your Citigroup (C) before they became single-digit stocks? Many value-oriented funds were buying Fannie Mae (FNM) months before it became Uncle Sam’s property.

No, but then again we should take personal responsibility for our market losses. Actually, the article would have been a lot better if it was titled “Professional Money Managers In Disrepute” and the unneeded references to buy-and-hold were omitted. But then again mentioning (or taking shots at) buy-and-hold and Buffett (I spared you from that remark) helps with the search engines and garners clicks.

Full Disclosure: No position in the aforementioned securities, but I did lose money in GE and C, in which I take full responsibility.

Comments

[User 283977:]

My takeaway from your article is that buy and hold is not equivalent to buy and forget. That all investments need to be actively managed. Did I miss something?

Apr 28 07:34 PM

[DonFurio:]

Couple of things, like anything else, most articles criticizing buy and hold forget to add in that most buy and hold investors will re-balance every so often to at least changed the allocation percentages if not actually move some money off the table if the equity concentration gets higher than planned for example. I know very few people that can successfully time the market, but to those than can, that's great. Also, of course the article doesn't mention that you can add more money to equities if you feel they are cheap or have the right yield and average down your cost. It's a lot easier trying to and wait for stocks go back up to an averaged in amount of DOW 10,700 then is DOW 12,500, for example. Most of these articles also fail to take into the effect of dividends and fail to consider that you can re-invest the dividends if you feel it is appropriate. Of course there arethe other fees that the articles fail to take into account, taxes, trading fees and the cost of the increased time spent trading. I could go on all day about this, but traders usuallty do a good job avoiding the big moves down, however they also usually wait too long to get in and don't get as much of the recovery as longer-term investors.

Apr 28 09:01 PM

[DonFurio:]

Unless you avoided diversification and did not start investing until 2007, most people are down between 20-50% and unless you are in retirement, you should be able to get everything back in more as long as you keep investing to average cost down, and do not plan on retiring for at least 5 years. Furthermore, you can draw down your bonds first if the market hasn't fully recovered. Also, you should never invest more than your risk tolerance, but the problem is that most people have no complaints when their portfolio increases, but bitch and moan like crazy when stocks go down.

On Apr 28 07:26 PM SOMALIA BAY CAPITAL PARTNERS ( DJIA CRASH 2nd WEEK OCTOBER 2009 ) wrote:

> you are not alone who lost money, here 99 percent lost between 50-99%
> of all their life savings and will never recover it.
> You are young, after 40-50 years you will do just great, think about
> 2008 ex-millionaires, who will eat Social Security coupons and junk
> soup from Monsanto with genetically modified corn...
> You will witness another bull in your life ( you will look much different
> then, boy) maybe and thank God for it, as most investors who are
> 50 now, will never see a bull in their lifetime.
> Good luck to you little boy!

Apr 28 09:05 PM

[Jasper M:]

Irony rules the universe.
Recent events have reminded the investing public, complacent after years of good news, that "'buy and hold' is not 'buy and forget'". So proponents of that time honored practice shoulder the task of defending and rehabilitating its reputation.

However, Any version of 'buy and hold' you care to name is justified only by the unspoken assumption of certain long-term background realities. One would not expect Buy and Hold to necessarily work under a socialist dictatorship. Or in a nation whose business class had absolutely given over to criminality. Or in a nation whose electorate lacked the spine to prevent debasement of its currency.

And thus the irony. The same circumstances prompting a 'purification' of the notion of "buy and hold" may be headed toward a situation where it may not work, At All. And for a very long time.

Apr 28 10:00 PM

[Alex Filonov:]

Buy and hold is just useless talk. Maybe there were some companies 30 years ago good for 10-15 year long investment. Of all companies I invested in, only one was good for 10 years: Apple. I invested since 1998 and have positive return overall, but I would be much better off if I sold most of my investments in 2-3 years after buying them. If you are too lazy, you can invest into index fund (better yet, ETF) and hold it forever. If you go for individual stocks, you need to research every stock you want to buy and research even more every position you hold.

Of course, last 10 years were hard. We might be close to the long term bottom, and buy and hold will serve better afterwards. Doing your homework and selling in time will serve even better.

Oh, and one more thing: rebalancing without thinking will kill your portfolio. Count on it.

Apr 28 11:40 PM

[cameroni:]

Buy and hold is the mantra of lazy brokers who want you to take it on the chin while they collect their commissions in a rising or falling market. I would kill myself first before I gave away my money so easily.

Then as now.

Cam

Apr 29 01:03 AM

[Steven Hansen:]

an old advisor once told me it is not so much the stock as the sector. once you identify the sector, the selection of the stock becomes relatively easy.

my point is performing sectors keep changing. and now today we are faced with a unpredictable future. in a long running bull market everything is moving up (of course at different rates) so buy and hold works no matter how lazy you are.

the bottom line is that i review my sectors monthly, and take action as required.

Apr 29 02:21 AM

[Moon Kil Woong:]

Buy and hold has become old hat for buy and forget how much you lost.

Apr 29 02:24 AM

[Jasper M:]

OH! Moon, i see why you have such high ratings!

Apr 29 02:34 AM

[TLassen:]

Put me in the group of people who believe Buy and Hold is still the best investment strategy. Far from perfect, but during my 28 years experience investing, I believe it still is the best method. I try hard not to get upset with people who make these grand statements of the demise of Buy and Hold. The experts (and I use that term loosely ~!) on CNBC actually ran a segment recently about the death of Buy and Hold…..must have been during ratings sweeps, but I digress.

Believe what you want, follow the advice of any pundit you wish, but do not tell me that the buy and hold strategy does not work. Could I have made more money applying different strategies, undoubtedly; have there been purchases I should not have made, for sure; did my stock investments not get hammered during the recent crash…..oh yeah they did. But overall, the buy and hold strategy has been very lucrative for me over the years.

Most people do not really understand the Buy and Hold fundamentals. Buy and Hold does not mean just buy any stock, hold on tight, open your statement in 30 years from now …and voila, magically you have been rewarded for your patience.

Three important steps are part of the Buy and Hold strategy:
First, a proper asset class diversification. Asset classes are Stock Market, Bond Market, Money Market and Tangible Assets Market (real estate, precious metals, and collectibles). Not Emerging Market (BRIC), ETF’s, Commodities, Mutual Funds as they are sub categories of the Stock Market Asset Class. I use an ultra- conservative 25% diversification between these 4 asset classes. This horizontal asset class diversification prevents me from being overexposed to any asset class.

Once diversified between the classes, I diversify my investments within the assets class. Apply individual risk tolerance at this step. I am a value investor by definition. I use a Financial Ratio strategy to select my individual investments, mostly I end up selecting large Cap dividend paying companies in the Stock Market Asset Class (across most sectors) I do buy some ETF’s and Mutual Funds as well, as they are excellent tools and offer good exposure to sectors I would be unfamiliar with. Steve Hansen uses a sector rotation method, which makes sense to me and should work well.
In the Bond Market Asset Class, I end up with more Government bonds than corporate, but each investor should apply his/her risk tolerance to this diversification.

Third step, and probably the most important step, is re-balancing the allocations back to original percentages on a scheduled basis. This applies to both the horizontal and vertical diversification. This re-balancing works well, because it forces me to sell when individual asset classes (or investments within the class) are over weighted. (Sometimes it is difficult to take some money off the table on high flying stocks!) But also it forces me to buy into markets at times when everybody else is selling.

It is hard to persuade people that a calm, long-term perspective investment style still can work, there seem to be many investors who believe that making Mad and Fast Money instantly (pun intended) is the only way to go. My point is, research, learn, educate yourself, exchange ideas with fellow investors, do whatever it takes to be successful, but making statements of the demise of strategies you may not completely understand is wrong.

Apr 29 11:09 AM

[Moon Kil Woong:]

I suppose I should clarify my statement. Every day you hold a stock is another day you take risk. Whether you own it or don't you are incurring both risk and opportunity cost. There is nothing wrong if you discover an apparent market imbalance to buy and wait for "full value" to be realized, but simply holding it because you become endeared to it can not logically be called investing. If you don't watch your positions and sell, buy or hedge acording to new data you are really doing yourself a disservice of ignorance.

Likewise to trade liike mad is to give up too much to transaction costs.

Regarding buying and holding forever. It has been said before, "If you buy with no intention of ever selling it can not be called an investment." Thus owning a home to live in is more a lifestyle choice than a real investment if you never plan on selling it. If you happen to beat taxes, inflation, maintenance costs etc. that's just an added benefit. An investment is something you acquire and then sell in the expectation you can make positive differential with respects to something else (often holding cash).

Last, the one thing working for you with a buy and hold strategy is tax breaks. This is humorous because tax itself can be looked at as a contributor to market imbalances. Remove all taxes or tax everything equaly and the market changes radically.

Take my thoughts any way you like. My feeling people professing buy and hold are more often than not taking the simple way out of making complex decisions in a complex market. A broker has a much better time professing this to clients than answering questions on every data point. The one bugging him every day is the smart rational one, not the one who never calls.

Apr 29 01:31 PM

[notsosmart:]

dont be fooled. be aware. the new wall st mantra is trade,trade,trade.they cant make a living pushing phony rated AAA worthless paper anymore so they want to kill buy & hold.if you have time on your side good div paying cos that have drip plans is the way to go.low fees & $ averaging worked great for me.dont let the scoundrels ruin you like they did to so many. think & act for yourself. all have an agenda & its picking your pocket. to the best of your ability do your own homework & believe no one. as you can read on this site nobody knows anything.

Apr 29 03:46 PM

[TLassen:]

Why do say "If you buy with no intention of ever selling it can not be called an investment."
I look at investments, not just in terms of capital appreciation, but just as important in terms of the cash flow that diversified investments can yield (from dividends and interest income) whether you choose to automatically re-invest (which I don't BTW) or rebalance on a scheduled basis, just Buy and Hold your core positions.
The 'notsosmart' guy below is right, the Talking heads are pushing the concept of trade, trade, trade (and declaring Buy and Hold dead) so they can make money and 'noise'. Their livelihoods depend on it.
Tune out the noise produced by the Talking heads. Peace

On Apr 29 01:31 PM Moon Kil Woong wrote:

> I suppose I should clarify my statement. Every day you hold a stock
> is another day you take risk. Whether you own it or don't you are
> incurring both risk and opportunity cost. There is nothing wrong
> if you discover an apparent market imbalance to buy and wait for
> "full value" to be realized, but simply holding it because you become
> endeared to it can not logically be called investing. If you don't
> watch your positions and sell, buy or hedge acording to new data
> you are really doing yourself a disservice of ignorance.
>
> Likewise to trade liike mad is to give up too much to transaction
> costs.
>
> Regarding buying and holding forever. It has been said before, "If
> you buy with no intention of ever selling it can not be called an
> investment." Thus owning a home to live in is more a lifestyle choice
> than a real investment if you never plan on selling it. If you happen
> to beat taxes, inflation, maintenance costs etc. that's just an added
> benefit. An investment is something you acquire and then sell in
> the expectation you can make positive differential with respects
> to something else (often holding cash).
>
> Last, the one thing working for you with a buy and hold strategy
> is tax breaks. This is humorous because tax itself can be looked
> at as a contributor to market imbalances. Remove all taxes or tax
> everything equaly and the market changes radically.
>
> Take my thoughts any way you like. My feeling people professing buy
> and hold are more often than not taking the simple way out of making
> complex decisions in a complex market. A broker has a much better
> time professing this to clients than answering questions on every
> data point. The one bugging him every day is the smart rational one,
> not the one who never calls.

Apr 29 04:03 PM

[consumerons...:]

Been addicted to reading about investing for over 35 years. Most of those I was either too young and stupid or too in debt to do anything with what I learned. All I could do was dream.
Doing better now. Building a solid dividend income that will keep increasing from now on, not because it's on autopilot but because I will keep buying shares in companies you little CRAMERS put on sale ever so often. Difference between me and most of you is I won't sell my retirement income to turn a quick profit so I can brag about how I "beat the market."
Frequent trading in an attempt to "beat the market" is not so smart, in my opinion. You are competing with maybe hundreds of thousands or even millions of other very smart people who will all read, study, and try just as hard as you do to - ahem - "beat the market."
I don't understand. SCREW the market! I do far, far, better than anyone else I know here in the area of SW missouri I live in just by buying good dividend paying stocks and building up my dividend income. Beats the hell out of everyone I know who just sticks their money in the bank if they try to save any at all. Oh, of course I know some people who buy crap like Ford and Motorola and don't realize they're gambling not investing.
Who cares what the market does? You're better off ignoring it.

Apr 29 05:29 PM

[baird:]

With respect and I do generally respect your opinions just how does even an enlightened investor do valid research on individual equities? Way too many uncertainties not to mention outright misinformation to ever accomplish this in my opinion.


On Apr 29 02:21 AM Steven Hansen wrote:

> an old advisor once told me it is not so much the stock as the sector.
> once you identify the sector, the selection of the stock becomes
> relatively easy.
>
> my point is performing sectors keep changing. and now today we are
> faced with a unpredictable future. in a long running bull market
> everything is moving up (of course at different rates) so buy and
> hold works no matter how lazy you are.
>
> the bottom line is that i review my sectors monthly, and take action
> as required.
>

Apr 29 05:42 PM

[Old Trader:]

A good article, and some very insightful comments. The other day, it dawned on me that the comment stream of any article regarding the "market", and which way it might be going, often became a "war" between the bulls and the bears, with each side arguing it's points.

Investing, to me, is not an "either/or" proposition. As several commentors have pointed out, a properly diversified portfolio that is rebalanced, from time to time, either because target allocations have become out of kilter, or because the manager of the portfolio sees changes in the investing landscape on the horizon.

Regarding sectors, I read something a while back that struck me as pretty sensible. It was said that 70% of a stock's price movement was dictated by the movement of the overall market, 20% was the result of sector specific issues, and the remaining 10% was the result of company specific issues.

Apr 29 08:15 PM