Buy and Hold a Bad Idea

We've long been "taught" that buy and hold is the best way to maximize return. But the data shows that buying and holding equities over long periods of time is often a losing strategy.

In an article I wrote recently, I compared the return of the Dow since 1970 with that the return someone would have received if they put their money into a plain old savings account. The conclusion was:

• Stocks will return more over long periods of time than ultra-safe savings and CDs, but not as much as I thought.
• Buy-and-hold does not hold up as an investment strategy. Buy low, sell high is a much better strategy.

Many readers were skeptical and I received a slew of emails claming I was trying to time the market and that I am anti-stocks. Yes, I do believe that investors should try to buy low and sell high, or sell once they have made money. Paper profit, as we have all learned, is not real profit. One investor I know sells any stock that doubles. She then takes that money and invests it in municipal bonds. Her simple strategy has produced vastly superior returns to almost all of the high priced money men on Wall Street and on the talk shows. She is currently buying stocks, believing, probably rightly so, that stocks are cheap. She sold most of her stocks in early 2008, when many of her investments hit her 2x threshold.

Is that a difficult strategy? I don't think so.

In fact, a recent Bloomberg article shows that buying and holding is even worse than I thought:

"Here’s one of Wall Street’s best-kept secrets: If you were investing 30 years ago, your best choice, for the long run, would have been super-safe Treasury bonds. That’s where the money turned out to be. Investors erred in their religious belief that stocks always outperform bonds, over holding periods of 10 years or more.

If you rush to safe havens today, though, you may get it wrong again. Looking forward, the opportunities probably lie in risk -- bonds as well as stocks.

It’s easy to see that bonds have done better than stocks for the past 12 years. For that matter, so has your mattress. Stocks have surrendered all the gains they made since 1997, in what investors are calling their “lost decade."

So when an investment experts says to invest in a stock or mutual fund, and then forget about it for 30 years, I say you've got to be kidding me. I say you give me your money, I'll invest it and you forget about if for 30 years.