Saving Face for Buy-and-Hold Investing

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Last updated on February 28, 2011 Views: 547 Comments: 16

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

Article comments

skylog says:

no shock here, on this site, the death calls of buy and hold are being silenced. good show. these articles are just par for the course. i was terribly amused by this comment, “On the plus side, all the ignorant articles on MSN enable truly intelligent investors to make more money over the long-run.”

Anonymous says:

You know what I don’t get and maybe you can change this Flexo – these guys never seem to get called out. Like does the guy who called $150 oil right before it imploded get fired? Why does he still have a job? Does this guy get made fun of anywhere except here?

Anonymous says:

Hi Evan,

There is a web site that tracks the “experts” predictions. I”ll post the URL if I find it.

Anonymous says:

Here’s the site:

skylog says:

thank you, i will give this a look.

Anonymous says:

Buy and hold never died.

Bobka says:

Just remember that Buy and Hold does not equate to Buy and Forget. Investors who subscribed to Buy and Hold would have done well to sell and take tax losses at the depths of the last recession. Then they should have reinvested in different stocks (or even the same stocks after waiting to avoid wash sale rule).. Today, those tax losses can be written against subsequent gains or even some limited regular income to reduce income tax liability.

The Latter-day Saver says:

Good point. I think that most people wish they could buy and forget, unfortunately it doesn’t work that way if you want to be successful.

Rob says:

I’m always amazed by how jittery investors are. When HP’s quarterly results came out, they didn’t perform as well as analysts predicted they would, but still posted a healthy profit. HP’s stock price dropped almost 10% in one day because of that.

Anonymous says:

So much of the financial advice recently seems to be of the “buy high, sell low” ilk. How does that make sense? I believe Warren Buffet describes buying stocks during a downturn as “buying them on sale.” That’s an awesome perspective.

Sarah says:

If you’re trading, or looking at the market at all, it’s too easy to get caught up emotionally. The market might only be going through it’s normal gyrations, but somehow it’s hard to remember that when you ‘lost’ $1000 in mere minutes.

That said, I think that setting aside a small portion of you portfolio for trading is fine.

Anonymous says:

Individual investors who trade frequently not only do worse than buy and hold investors (and any market index you want to pick), they actually lose money over the long run.

If you want to time the market, do it with 5% of your portfolio. I buy individual stocks with that 5%, usually with a large cap value or small cap growth focus. I tend to do quite well with that money, but I don’t trust myself to do it with the whole nest egg.

Anonymous says:

That’s exactly why I did a post on the myth of the “lost decade” of investing which the media loved to toss around, claiming nobody made money over the past ten years in the stock market. My data shows that for people who did the right things: 1. create a diversified portfolio. 2. regularly invest over time. and 3. rebalance regularly, actually saw annualized gains of nearly 4% since the year 2000, and a cumulative return of nearly 50% over that time. A far cry from looking at the price of the S&P 10 years ago and comparing it to today and saying there’s no way to make money in that market.

Ceecee says:

It takes discipline to buy and hold. The easiest way seems to be to buy and and then just don’t look at the market at all. The sell temptation is always there on an uptick.

tbork84 says:

I definitely agree, the downside to these claims that buy and hold was dead is that a whole lot of people sold when the market was at its lowest. Its really a shame, but hopefully it was a painful lesson learned for investors.

Anonymous says:

All due respect…Buy-And-Hold never left