The Rebirth of Long-Term Buy and Hold

Includes: DIA, QQQ, SPY
by: Dean Morel

I wrote about my approach to tech investing and my issues with long-term buy and hold (LTBH) investing a year ago. 'Issues' may be a tad mild as I wrote

I view the classic investing style of long-term buy to hold or worse, long-term buy and hold (LTBH), as one of the most dangerous philosophies newbie investors can be exposed to.

Read the post if you want to know why.

While I wasn't the first person to have fired a shot over the bow of the LTBH ship, many shots have since been fired. To me, it seems the LTBH ship is now so full of holes that I should swim over and try to rescue a few survivors.

While I won't recant my LTBH slamming ways, I now feel it has become so unpopular that it could be a great time to start some good old LTBH investing.

No, I'm not simply being contrary and I'm not going to change my investment philosophy or strategy, but for many investors out there I think now is a great time to start pouring money back into equities for the long-term. For any long-term reader, that may sound familiar.

Yes, I began recommending averaging into the markets in October 2008 when I wrote The Bear is Dead - Long Live the Bull.

In the prematurely titled "The Bear is Dead", I presented the following spreadsheet and comments.

While is it impossible to accurately time a share market top or bottom it is possible to buy at around the bottom. Dollar cost averaging from the current low levels almost guarantees you will buy near the bottom and will come out the other side a winner. Feel free to use or download this spreadsheet to test this concept. You’ll see that if you believe the market will someday be higher then dollar cost averaging won’t lose you money.

I've updated the spreadsheet with actual returns based on buying at the monthly means since October and buying on specific dates each month. Click “Full Screen View” if you want to play around with this spreadsheet.

Since October, an investor using dollar cost averaging (DCA) has outperformed a one off buy of the S&P 500, a cash strategy and a short strategy. The DCA strategy has outperformed the one off buy every month except the first one. Currently the three DCA strategies are up 10.3-11.6% and are all ahead of the one off strategy by between 4-5.4%. Pretty good returns for no time or effort and no stress.

Do I eat my own cooking? Well, I do cook a delicious seven hour roast lamb, but I don't employ straight forward DCA. I'm not suggesting DCA is the be all and end all of investment strategies, though I will say part time investors should be adding money to the market now, rather than sitting in cash and waiting for the next bull market to once again plunge in near the peak.

I did start averaging into the market in October using the Ultra Bull Fund, ULPIX, but as I discussed in this post I quickly realised that volatility destroyed that strategy and I reverted to picking stocks.

The Bull Market will return someday.I am not saying the bull is back in town. I'm saying it doesn't matter whether it is or not. In this series of posts, I've tried to highlight that there is a probability of good returns in the not to distant future, but at the same time it's not worth spending too much time trying to predict the near term direction of markets.

Long-term buy to hold was inappropriately pushed by investment experts during recent bull markets and has since rightly been pulled down a notch or three. However, LTBH combined with dollar cost averaging remains a useful investment strategy to employ at this point in the investment cycle. Horses for courses; at market lows LTBH and DCA make sense, as markets become overvalued those strategies put you on a fast track to a world of hurt.

As I wrote yesterday, seeking a sense of peace and control is important in my investment philosophy. Averaging in and out of the market is another plank in my investment bridge to equanimity. It removes the stress of trying to accurately time the market while allowing me a sense of control that I am timing the market. Averaging in during the bottoming process and out during peaking valuations is an attainable goal for investors. Adopting a longer term perspective during market troughs also assists in controlling emotions.

I did promise my perspective on market direction. As I've said, I see little value in predicting near term market directions; however, I do like to maintain a mental image of what I think is most likely to transpire and hey if you've read this far you deserve a good laugh. I think the re-inflation of the world economy will succeed in the short term, with markets moving higher over the next few years.

I don't think we'll see new stock market lows in the near term, but anything is possible and we're not out of the woods yet. I think we're still in a secular bear market and the coming rally will last a few years before the markets plunge to their ultimate bear market lows in the 2012-14 time frame. With a new secular bull market starting in the 2014-18 time frame.

This is my final post in this series on stock market returns.