Tuesday, December 15, 2009

Is Buy and Hold Dead?

Copyright 2009. By Paul Mladjenovic

In today’s turbulent, volatile, roller-coaster market, is the age-old adage about “Buy and Hold” bad advice? In recent months I have heard or read comments such as…

“The “Buy and hold strategy” is an archaic idea and would be financial suicide in today’s market.”

“People are better off with short-term strategies so that they can try to buy before the market goes up and sell before the market goes down. Then…when the market goes down, that is a buying opportunity. Use the volatility in your strategies”

“The “Buy and Hold Strategy” was fine a long time ago when markets were different. It is not a good strategy for today’s roller-coaster markets”

I am sure that you have read or heard similar remarks. Certainly, as you have read my essays you would know that I have written much about the “sea change” in recent years for our economy and the financial markets. There are many strategies that were fine years ago but would indeed be dangerous today.

But does a “sea change” mean that fairly reliable strategies are in danger of becoming obsolete? It certainly depends on the strategy and it definitely depends on who you are, what your financial profile is, what you are trying to accomplish and what type of assets you are investing in. Let’s take a look at “Buy and hold”.

I am sure that if you “buy and hold” bad investments then you will eventually be in trouble. However, if you “buy and hold” good investments, it would be a different story. We all know that the decade of 2000-2009 had lots of wild rides and the market had many nail-biting moments, but how did the “buy and hold” strategy do?

How did “buy and hold” as a strategy fair for different assets since the beginning of the decade?

Asset class January 2000 Recent price Gain/Loss
(high price) (Nov. 30, 2009) After 9 ½ years…)

The “Dow” (DJIA) 11,722 10,345 DOWN 12%

Nasdaq Composite 4,235 2,145 DOWN 49%

S&P 500 1,465 1,096 DOWN 25%

The value of the dollar 99.87 85.64 DOWN 14%
(based on dollar index)

Oil 21 71 UP 238%

Gold 288 1180 UP 310%

Silver 5 18 UP 260%


As you can see from the above table, “Buy and Hold” was dumb for some things and very smart for others. There was nothing wrong with the strategy…it depended on the particular investment vehicle.

Very recently, I was asked how I did during the recent market mayhem. I answered quite honestly that a batch of my favorite stocks and ETFs were hit very hard during late 2008-early 2009. Some of the positions were down a bone-jarring 50-70%. Did it bother me? Sure…why wouldn’t it? But these were quality securities that were intended as long-term core holdings and not capricious vehicles to jump in and out of. “Buy and Hold” means that you “measure twice, cut once”. Those stocks and ETFs were bought early in the decade and they are almost all up by triple-digit percentages…Yes!…in spite of the chaos of 2008-2009.

“Buy and Hold” as a strategy is fine. It has served me and many other patient investors well. It is still an important feature of patient, successful, long-term investing. The point is to understand that particular investment and what are the economy, financial & political mega-trends that unfold over a long period of time. Good investments will zig-zag upward over the long term while bad investments will zig-zag downward during the same time frame.

If you would like a good course on how to invest, you can check out my national seminar entitled “The $50 Wealth-Builder” at www.ProsperityNetwork.net (see Bronze package). I cover stocks, mutual funds, ETFs, precious metals and real estate.

What mega-trends do I see coming? For the coming years, I expect the commodities bull market to continue and I tell my students that investments tied to “human need” will excel. To learn how to invest in today’s economy, the audio financial seminar mentioned above will provide you with the guidance you will need. In spite of the recent stock market rally, I believe that my twin-forecast will come to pass in the next few years; We will see both rising inflation and a depressed economy unless they radically change course in Washington (Don’t hold your breath!).

Paul Mladjenovic, CFP is the instructor of the national financial seminar “The $50 Wealth-Builder” and the author of “Stock Investing for Dummies” and “Precious Metals Investing for Dummies. His website is www.ProsperityNetwork.net.