Is "Buy and Hold" Still a Good Investing Strategy?
From the time I started investing for the long-term, the majority of the advice I’ve read has pointed towards buying stocks and holding them for decades. Most specifically, this advice is usually recommending stocks in the form of index mutual funds.
This is in strict contrast to the practice of following trends in the news, trying to buy and sell stocks frequently. The reasons that this strategy was being recommended were always similar to these:
- Stocks are risky and volatile. However, they provide the best opportunity for growth over the long-term, with annual average returns of 7% to 12%, depending on whom you ask. This is higher than any other type of investment.
- Trading costs money. This is thanks to fees, and these fees eat into your returns. They exist to help brokers get rich, so brokers encourage you to trade.
- Index mutual funds allow you to invest in stocks for a low cost. Other mutual funds try — and mostly fail — to beat the indexes. Of course, they also charge higher fees regardless of their success.
- Index funds also allow you to broadly diversify. This reduces your exposure to the success of any company in which you invest.
So, I’ve been hearing this same advice for many, many years. But have these fundamentals changed over time?
Today’s Dynamics
An article in MSN Money claims that the advice above is a lie. The reason for this is that the “level of risk in the stock market changed violently” in 2007. Essentially, things have changed, so your strategy should, too.
If this were true, investors who believed they built a moderately risky portfolio — including stocks and bonds or cash — prior to 2007 would suddenly have a riskier portfolio. I was under the impression that stocks were always risky, which is why they provide the opportunity for the largest long-term growth.
Looking back at 2007, it’s quite easy to pinpoint the exact moment you should have sold stocks. It’s also easy to look at what was happening in the market, point at something, and declare it was a “sign” that it was time to get out of the market.
Of course, hindsight is 20/20, and none of us know exactly what the market will do in the future. Just as those investors in early 2007, we can only guess… even today.
Today’s market has bounced back from 2007-2008. Most investors — those who held their ground — have regained all that they lost and then some, and are enjoying today’s present market. But there are rumblings of the next big crash, and when/how hard it will hit.
This is why my advice is always to hold on to investments for the long-term, regardless of what the market does. Once you buy stocks, you buy them forever. If you go into it with that mentality, it’ll make it much easier to weather those big dips, waiting for prices to recover.
It may take time for a market crash to bounce back, but that’s why adjusting your allocation over time (especially as you near retirement) is so important. Being able to invest your money and ride out the storms without panic is key to letting your portfolio grow.
Moving Forward
As for me, I am still sticking with “buy and hold” as a long-term growth strategy. If (or when) the market crashes again, I will hold on to what I have and weather the drop. Selling low is the easiest way to lose money in the long-term, and I’m not interested in throwing my hard earned savings away.
Have the fundamentals changed? Are stocks riskier now, or is this volatility just a side effect of the risk that has been there all along? Is the “buy and hold” strategy just a fad that is no longer relevant for today’s stock market?
I don’t think so. I believe that buy-and-hold is even more important now than ever before. And if you held on to your stocks after 2007-08, you’re probably right there with me.
Do you question the value of buy-and-hold? Why or why not? Sound off below!
Article comments
The concept of buy and hold is intact.
With constant investment and reinvestment of dividends, over time, there has never been a 20 year period in which your investment would have lost value. This is because reinvesting dividends and continuing to buy the downs as well as the ups gives you a smooth line of growth.
The only loss you can incur is the loss when you sell after a quick decline.
All declines in the market are followed by increases when it’s realized the sell off was overdone. Today the market sits at about 7,050 – this is well below the FAIR VALUE of stocks, which should be about 7,300. 7,300 also happens to be where the market should be if you took the last 2 “true bottoms” of 1932 and 1974 and drew a straight line up at 7% growth per year.
Remember, 7% growth is higher than the growth of GDP BECAUSE the Dow is made of components which, on average, GROW FASTER than the GDP since they are the mainstays of the economy. These the best companies in the US, in theory.
So, today, it’s fair to say that even with government intervention these companies are likely to continue being the best (until they are replaced with other firms in the index).
The other fallacy at work today is that companies like Citi and GE and others are “not profitable”. This depends on how you’re viewing profits. From a strictly operational standpoint, they are very profitable. The issue isn’t day to day operations which is causing them problems. It is their asset base, which is eroding. Since markets for CDOs and other estate based holdings have evaporated, valuing these things is very difficult. Thus, the “mark to market” rule is forcing all the companies to price down their values of their portfolios, which means their operational profits are being wiped out by losses in asset value. This puts their capital base at risk AND creates imbalance on their balance sheets that require capital infusions above and beyond their profits. Not a very steady place to be, if this were to keep happening over the long haul.
However, lots of companies are very profitable AND still have strong balance sheets. They are not doing anything yet because they are waiting to see how things sort out – but when things DO sort out, they will be buying with a vengeance, and on the cheap. THUS, the markets will move again, upward, in a very violent fashion. I would not be surprised to see the Dow at 10,000 in a year, or possibly 2. If this happens (and I really think it will) this means annualized gains of 21 and 17% over the next 2 years! If you’re not in the market now, you will get none of this. You could enter when you feel more comfortable, say when the Dow gets back to 8,000 – but the Dow was at 8,000 not too long ago and you didn’t get back in then…..so you’re unlikely to do it at 8,000. Chances are you’re likely to wait until 9,000.
The point remains – being out means you may have saved something from the current downdraft – but it means you’re likely to miss a huge part of the nascent updraft. Buy and Hold rules the day….but you do have to remember to occasionally take something off the table during the good times.
I agree with “buy and hold”, but with some obvious caveats:
One, if you have seen an incredible run-up to the point that the PE ratio simply seems ridiculous, then sell at least some of your position. Nothing wrong with locking in a profit; you pay your taxes, keep the rest of it, and get on with life. Generally this kind of obvious distortion is more applicable to individual stocks, but in 1999 it was starting to get obvious for the entire NASDAQ index. There were some excellent companies, but in many cases companies had PE ratios of 500 and more. Simple math suggested that unless, e.g., Amazon.com were within a decade to earn a profit adding up to greater than the value of the entire US economy, this PE ratio was way too high. In such cases, if you’re long you sell and take your profit; if you don’t have a position then you wish “congratulations” to those who do, and wait for another opportunity to come along. It was pretty obvious to a lot of people that the entire NASDAQ index was over-valued at that point, and I know someone who thought it overvalued at 3300, sold his index and took his profit, endured a bit of teasing as the index quickly worked its way up to 5000… but then watched as it dropped hard below 2000 and, if memory serves, it has never come close to 3300 since. So he left some profit on the table– so what? He sold because a) it was obviously overvalued, and b) it was impossible to predict when other people would recognize the obvious. (There’s also nothing wrong with selling to cut your losses, if it becomes clear that a company has taken on too much debt or if it otherwise seems to have lost its way).
Two, the buy and hold strategy works only with the assumption that new money is constantly going in. Which, of course, it should be. Indeed, those who criticize “buy and hold” often overlook this obvious point. They say things like “if you bought and held the Dow Jones in 1929, you didn’t get to break-even point until 1952.” Which of course is nonsense. That share you owned as of 1929 certainly was at break-even point… but that share you bought in 1932 (because, not being a moron, you WERE still buying shares) has doubled in value.
look at the Nikkei Index, say you bought into an index fund in 1984 when it was trading around 11,000. in 2004, had you bought and held, you’d be at 11,000 still. if you sold at the height of the market in 1989, you could have sold for 38,000. so obviously it depends on when you sell, too.
Many of the comments are quick to dismiss the idea that “buy and hold” is no longer a good strategy. For a lot of folks who have been “holding” the evidence is in. If you entered the market in the mid to late ’90’s, buy and hold has been a terrible strategy for you. For you younger folks who assume that all of this will correct itself in the next 10-20 years, I think you are overlooking the confidence factor. Confident investors are who drive the markets up. Who are those confident investors now? I submit to you that for many investors (including this one), the damage done to our confidence is substantial and long-lasting. I will never again invest with the aggressiveness that I did for the last 20 years. There are millions like me. For that reason, I think it is a 50-50 proposition that we are in for a 7-10 year stagnant market. It will take that long for memories of 2008-2009 to fade.
Interesting comments. I knew this topic sounded familiar so I looked it up and, sure enough, I wrote a post entitled Rethinking the Buy and Hold Strategy in July of last year. It seems I had some doubts about this theory I’ve held dear for so long.
But what else did I find? A post from October 2008 where I rediscovered my faith in buying and holding.
Just goes to show how the emotional side of investing is so important.
And yes, I too am still buying.
Ha, I love Apex’s comment. Completely true — the author uses fancy words that don’t mean what he’s trying to say. And rather than using the delicate levers of asset allocation or diversification, he suggests using the sledgehammer of…what? Oh yeah — there’s no point to his article.
This article probably has no basis in anything worth listening to at all. But if the author can pass one test then its worth a look. If he fails this test then he is a worthless opportunist who should be summarily dismissed.
The test:
When did he first write about this increased risk that he says started in 2007 and is so obvious? September 2007? October, November, December 2007? How about January 2008? March? Maybe May 2008?
If he didn’t write it down in an article, identify it as such then, and recommend whole sale liquidation at the time this obvious increase in risk occurred or shortly there after then he is a charlatan post-dictor and is worthless. Accurate predictors are worth listening to. Post-dictors are really good at reading headlines. However I don’t need assistance in that area, so I have little use for them.
This guy, like many finance authors on MSN, not only has no clue what he’s talking about, but is saying the exact opposite of what is true. When the stock market goes down, the risk goes down with it. The cheaper the prices, the less the risk.
On the plus side, all the ignorant articles on MSN enable truly intelligent investors to make more money over the long-run.
Is he suggesting that, due to the increased volatility (risk) of stocks, the overall diversified market portfolio would now have a return of less than cash, perhaps due to a continuous loss/sale of under-performing stocks canceling any increases in good stocks? Wouldn’t that also mean that, after 2007, the market as a whole would have sporadic to no movement, and thus our economy as a whole will no longer grow (except for few companies that grow fast, then fizzle out)? Sounds like BS to me.
I think so.
The whole point of higher risk is higher returns. I’m not saying it’s pleasant, and this is certainly a big drop, but I don’t think the risk/reward tradeoff goes out the window (“hey, guess what: you can just trade tactically and you make more with less risk!”). It never will.
I’m open to the idea of having a tactical portion of your portfolio, but I don’t think people should be doing it themselves unless they spend all day at it. I’ll let active managers make those decisions – with a small portion of the portfolio.
It goes back to asset allocation. For investors with a long time and a strong stomach, this market is probably a good thing (ignoring the stress, job/home losses, gov’t intervention and consequences, etc). If you’re retired, hopefully you had more in bonds. Even bonds got hit, but that’s part of the program. If you wanted to be as safe as possible why weren’t you FDIC insured products?
Changing your religion now is probably too late.
I agree with you. The idea that every investment will always gain is something that we have been led to believe. A downcycle is natural (although this one is big, due to unsustainable growth). Anyway, like you, I’m buying.