Saving Face for Buy-and-Hold Investing

Two years ago, Michael Brush from MSN said, like many other financial columnists, that the buy-and-hold investment strategy, or the long-term efficacy of that approach, is a lie. This echoed a lot of the prevailing popular thinking at the time. The stock market was at an all-time low. People who believed in buy-and-hold investing, which says one should avoid trading frequently in favor of holding investments for the long term, where particularly hit by the stock market downturn.

Experts pondered whether the stock market had fundamentally changed. The average annual returns of 8% would never be seen in domestic equities again. The MSN article provided the reason for this paradigm shift: there was more risk in stocks. I liked this response from a reader:

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.

Matt Krantz, financial columnist for USA Today, has good news for buy-and-hold investors:

Investors who have hung on haven’t done all that badly. It’s true that the stock market is still roughly 15% below where it was at its 2007 peak. But buy-and-hold investors have actually done better than that. For one thing, these investors have continued to collect their roughly 2% a year dividend yield. Adding that in, investors are only down 9% from the high.

Yet, many buy-and-hold investors are probably doing even better than that. One of the key tenets of buy-and-hold is continual investing. Rather than trying to time and market and dart in and out of stocks, prudent buy-and-hold investors added to their investments during the downturn. If you did that, buy-and-hold has paid off handsomely for you and has helped to get you to back even to the peak. In fact, many buy-and-hold investors might even be up from the 2007 peak if they bought during the downturn.

Michael Brush’s MSN article from 2009, which echoed popular opinion, should have been a good sign that enough investors had given up on the stock market. The sentiment, in a short two-year context, may have signaled the best time to double down and take advantage of low stock prices, with the exact buy-and-hold strategy that was being vilified.

There certainly is a possibility that the stock market will fall again, and perhaps find a new low water mark. Political unrest around the world is usually not a good sign for global short-term economic growth. Nevertheless, over time, those who continue to buy will most likely be rewarded. Buy-and-hold is back.

USA Today, MSN