Buy and Hold is Dead in the New Age of Investing
The End of Buy and Hold Investing?
With the Dow dipping to the mid 6K range (down from 14K) and the S&P 500 facing a similar decline recently, market levels like this have not been seen since 1997. This means that if you put all of your money, let’s say $100K, in one of these market indexes back in 1997, you’d have, well…just about $100K and no return on your investment in 12 years!
If you put in all of your money in these indexes after 1997, you most likely have had a negative return on your investment. For those who are just starting to invest, what does this all mean for the common investor? We’ve all heard some variation of the time-tested (until now) philosophies:
“Buy and hold – be patient.”
“The stock market has returned 12% historically since the Great Depression.”
“Investing in index funds, mutual funds, and stocks is the path to retirement.”
Will the Old Buy and Hold Philosphies Still Work?
Sure, stocks, ETF’s, and index funds will still be the primary way to grow your wealth and get you the highest returns over time. Also, some variation of buy and hold will be successful (but not holding forever unless it’s a high paying dividend stock or fund).
What’s dead is buying and holding the general U.S. stock market indexes – the S&P 500, the Dow, and the NASDAQ. I just don’t think that this is a wealth building strategy any longer. These indexes have performed well over the long, long haul historically due to the following factors:
- huge agricultural and technological breakthroughs (fertilizer, cars, planes, the computer, the Internet)
- a dramatic rise in the amount of investors and money flowing into the markets
- rapid inflation due to massive amounts of credit passing hands
Going forward, you most likely will see diminishing returns in all three areas.
Additionally, beyond any other factor, is that the market is now being influenced and controlled by the media, hedge funds, and the use of illegal and anti-growth techniques. The common ‘buy and hold the general market’ investors are getting slaughtered.
Investing Strategies that Still Hold True
One philosophy that I see continued value in for a long time to come is Warren Buffet’s:
“Be fearful when others are greedy, and greedy when others are fearful.”
What does this inherently mean? Well, look at the tech market back in the late 90’s and the real estate market of the mid 2000’s – hoards of greedy investors were pouring money into these markets with the hope of getting rich quickly. They were greedy. What happened? Those who got in late in the game and didn’t sell in time lost just about everything. However, if you had followed Buffett’s strategy, you probably would have sold. On the flip side, look at the market up until about a week ago. You couldn’t find any positive market news ANYWHERE. This is the close to the ultimate high point of market fear. Could fear get higher from here? Sure. But we’re talking about relative fear and greed points here. You’re never going to be able to time the market perfectly.
How I Plan to Invest Going Forward
The following is not investing advice (I am a horrible investor, so do not listen to me), but going forward I personally plan to:
- Buy beaten down (well beyond fair and rational valuation) market sectors at the high point of fear and selloff. I will do this mostly through index funds and ETF’s, and occasionally a stock or two. I also plan on putting money into stocks that offer a high dividend yield at a low risk and have continually increased their dividends over time.
- Sell these sectors when they are up (well beyond fair valuation) and a healthy amount of greedy, return-chasing investors jump in.
- Once sold, I will place my money in FDIC insured CD’s (laddering the time span), high yield savings, or money market accounts so that I can quickly access this money when needed.
- Use low cost online discount brokers – primarily and Zecco.
I’m not talking about day trading or even yearly trading here. What I’m going to do is invest in sectors based on where in the growth and decline cycle that sector is in. What’s this going to require?
- A ton of patience.
- Education on how to fairly evaluate a market sector and where it’s at in it’s cycle.
- Liquidity.
- The ability to be a contrarian and go against the grain, or to tune out the noise.
- Time.
- A lot of work.
Work is key. Most people aren’t willing to put in the effort that it will take to be a successful investor in this new investing climate. There won’t be any lucky common investors who can pull in 10% annualized any more. Be an uncommon investor who is willing to educate yourself and put in the time to research and you may fair well.
I will also say this – I’ve been wrong many times before, and there are lots of valid reasons to invest in index funds and buy and hold – even Buffett likes this strategy (in addition to his strategy of buying more when everyone else is selling). Invest at your own risk, I’m not an expert by any means.
Buy and Hold Investing Strategy Discussion:
- What will your investment strategy be going forward?
- With the recent market collapse, has your investing strategy changed?
- Is buy and hold dead? Take the Poll!
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Timely post. I’ve been wondering if buy and hold is dead, myself. It appears that the old ways of investing simply aren’t going to pay off in the long run, especially with short selling and our negative slanted media.
Buy and hold has never been a “universal” strategy for any market. I think you’re right — focus on the specific market, and buy cheap and sell high.
Of course, it can be risky to try to time the market correctly, but that is almost always true regardless of which market we’re talking about.
Plus, the entire global economy is shifting towards India and China. I’m not yet familiar enough with the situation to see what the real long term impact will be on US stocks, but I can’t imagine that it would be good.
I don’t think that “work” is the key. I think “objectivity” is the key.
In other words, while your new articulated approach to investing does make a great deal of sense, I believe you need to have objective benchmarks. When will you “KNOW” when to sell or buy? How? I believe these triggers must be observable. If not, emotions can over-ride your approach.
Either way, it was a very thoughtful post.
Man, why didn’t anyone else think of this system? Buy low and sell high — it’s genius! There’s just one problem, if it was as easy as putting in the “effort” required, then why don’t actively managed mutual finds perform better than index funds? They don’t because it is IMPOSSIBLE to time the market, if 100 years of market history has proven one thing it is that you cannot CONSISTENTLY beat the market.
Oh, and since when does a 12 year span reflect the “long term”? Assuming you have a decent asset allocation defined, you wouldn’t have been 100% in stocks anyways, and including dividends and interest over the span of 1997-TODAY, you’d likely have a bit of a return.
This advice is extremely naive, maybe that’s why it’s in a “20 something finance” blog. If you don’t want risk then stay out of stocks, your “plan” isn’t going to make you anymore than sticking with market based indexes, and you’re likely to perform worse after you include the brokerage fees and failed market timings.
The advice you’re giving is irresponsible and inappropriate for a site offering guidance to naive savers. Well educated, intelligent, thoughtful people who spend their lives trying to do what you suggest end up losing a lot of money. What makes you think you’ll be able to do better than the S&P 500 over the course of 10-20 years? Please revisit your suggestions and consider posting a revision.
I think we’ve just gone though a bubble. Not the first – not the last. Buying and holding good value, income producing equities still feels right. In fact, I’d urge my kids into investing into this market – clearly they’re better off doing it now that last year.
Great in theory, very difficult in practice. I personally think now is the time to buy in, but I understand people who are waiting to try to time it just right.
Hello!
Very Interesting post! Thank you for such interesting resource!
PS: Sorry for my bad english, I’v just started to learn this language
See you!
Your, Raiul Baztepo
I agree with your comments that we are in a new revolution of investing and the “Buy and Hold” mentality that worked for an earlier generation may not work so well going forward. We see Tactical Asset Allocation and Sector Rotation strategies with ETFs as the future of investing to beat the indexes. There is no doubt it requires a lot more work and discipline, but it is worth it over the long run.
Ahhh..Gosh i have been thinking about this myself. Very interesting topic. Being a relatively new investor, my strategy for today’s market is to invest in low price stocks and sell them relatively fast. I feel for long term investments something like 401(k) and a roth ira account are good enough and have got me covered. I am using stock as a get rich quick scheme and maybe conducting one of the fundamental errors of investing as i have read in several articles. I guess i’ll just have to find out for myself…
I am a new investor too and I kinda regret started in stock trading late. Since I have to deal with the new stock market environment, my strategy include investing in high yield at low risk investments as well as placing my money in high yield savings account. I am also thinking of investing in mutual and index funds. I will definitely not give much thought about option trading.
Buy and Hold philosophy have worked out for me for quite some time and I am actually comfortable with it. However, since the recession changed the stock market climate, what you have said is true. I am slowly being slaughtered and being greedy is a better option than the old buy and hold scheme. If I am Buffet, I will gladly pour my money despite of the risk. Sadly I am not.
The stock market is too volatile and one false move, I might see my money swirling down the drain. So to prevent this, I would rather place my money on high yield at lower risk investments and savings account. I am also considering investing in Mutual and index funds but I have little knowledge about it.
I really hope that the market will regain its strength soon. For now, being cautions and patient is the best option.
By and hold is far from dead, especially in the recession when everything is under valued. Now is the time to buy low and hold for appreciation to deliver a future profit. Mentor Capital (MNTR) may be just the stock for this strategy since stock price gains could result from the 20% merger they have with a bio-tech company in the clinical trial process of marketing a new breast cancer treatment that seemingly trumps all others.
Now bad time to buy. Has voted NO. But movement can change. Therefore it is necessary to supervise a situation
This article and site do nothing but perpetuate terrible investment advice for a new generation of investors. I would vernture say that most investors never truely bought and held in first place. And the ones that did, only did so because they didnt know what else to do.
Most academic professors have debunked this market timing crap that the street pushes like an exciting new toy. Oddly it’s the same old story. We know what you dont so pay us. Madoff. Finance models indicate timing only accounts for 4% of asset class returns vs. 96% resulting from mutliple factors (fama/french). Even if your not indoctrinated with efficient market theories and you think the markets are in-efficient, so what. Try and trade on it.
The article murders the context of Mr. Buffets quote. Buffet who stated most investors should use sensible low cost index funds. Whats that..time and time again 85% of active traders fail to beat indices over 5 and 10 years. What… everyone lives for more than 10 years…. No.
Why is it that most of the investment community/media have not progressed. I remember typing into my computer dos prompts for gods sake. What was it…Don://win/joust.
Your site misdirects a new generation adivse seekers online. Now we have new people who profit off active trading or low cost/trades a lot (hmmm trading fees) brokerages. Replacing the guys on the street. Common sense tells you that you can’t pick the next horse at the track or the next stock. C’mon!! Can we start fresh please with new media and get rid of 99% of “active advice givers.”
The world is upside down when Vanguard founder, Bogle, who preaches and writes of the the failure of active management but then come to find that Vanguard has over half of their offerings using “active” management.
RRRR
While it may be true that the market indices haven’t budged much over the past decade, it’s not necessarily true that buy and hold index fund investors have done poorly. If you’re automatically reinvesting your dividends free-of-charge in a low-cost index fund, you’re probably doing all right. And a down market is the perfect opportunity for outperformance as dividend yields increase. Jeremy Siegel highlights the power of dividend reinvestment in his 2005 book The Future For Investors. In one example, he shows that a purchase of the market index in October 1929 would’ve returned 0% over a 25 year period when you exclude dividends. But with dividends reinvested, it generated a 6% annual return. This shows the amazing power of dividends, particularly when market prices are depressed. Under the right circumstances, buy and hold is still alive and well!
I agree with some of what you have to say but I don’t think Buy and Hold is dead. I don’t think that it was ever even alive.
Mutual funds are the ones that sold people on the concept of Buy and Hold because that is how they can collect the most fees. What is even scarier is that those promoting the Buy and Hold approach lead people to believe that an average annual returns of 8+% can be expected over the long term. This is such a half truth it is a lie.
Market history reveals that success through Buy and Hold occurs only when you are lucky enough to hold during a prolonged period when the market does well. There have been three periods longer than 57 years when the US market has achieved no real growth at all after inflation.
The Buy and Hold investor thinks that they can’t lose over the long term but not many realize that the long term on the US market historically has been up to 130 years!
Buy and Hold is the best option for most people, it is a much better option than not investing at all but for the diligent investor it is still far from the best option.
See how the numbers stack up here – http://etfhq.com/blog/2010/02/19/buy-and-hold/
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