Stocks: Is "Buy and Hold" Still Best?

Posted by: Ben Steverman on July 2, 2009

PNC, in its July 2009 Investment Outlook, asks whether the “buy and hold” investing philosophy no longer works. PNC’s investment strategist, E. William Stone, does a good job of clarifying the key issue. He notes the last decade has been terrible for investors, and then writes:

Is the long-term expected real (after-inflation) return on stocks no longer positive? In other words, if the expected return is no longer positive, then an investor would need to trade in and out of stocks in order to earn a positive return.

Stone then reviews the evidence and concludes what most (though not all) financial advisors have been saying for decades. Stocks do tend to outperform other investments and also inflation over long time periods. Plus, jumping in and out of the market is difficult, because it’s very hard to do so at the right time.

Whether you agree or not, some pieces of evidence from PNC are worth considering:

PNC looked at 881 rolling ten-year time periods for the S&P 500 since 1926. Adjusted for inflation, 119 of those time periods (13.5%) showed a negative return. That’s a surprisingly high figure, which underscores the significant risk that investors do take when they put their money in stocks.

Second, Stone’s team reviews studies, looking at dozens of countries, showing “essentially no correlation between the rate of GDP growth and real returns on stocks — in fact the correlation is slightly negative.”

That’s an important point because many bearish investors expect slow economic growth for many years to come. And they cite these economic doldrums as a reason not to own stocks for now. Stone, citing this research, argues this is a poor rationale.

But how could it be that the economy could grow and equity investors earn nothing? Or that an economy is stagnant but stock investors benefit? I’m intrigued by one possible reason:

GDP can grow without gains accruing to equity shareholders. In some countries the GDP gains might accrue primarily to the government or workers.

Whether or not economic growth is slower in the next decade than in the last decade (and I think that’s highly debatable), this passage raises a troubling question for investors. Might we also be facing a situation where political developments in Washington — more generous health benefits, tighter financial regulation, pro-union labor laws and regulators, environmental rules — limit investor gains even if the economy does grow?

We don’t know the answer to this question, or to many others. And that uncertainty about the future is one reason why I remain, cautiously, a buy-and-hold investor. (The other reason is that I see few proven, viable alternatives to buy-and-hold.)

But what do you think? Is buy-and-hold still a useful investing philosophy?

Reader Comments

George Kotsifos

July 3, 2009 9:41 AM

Talk about a conflict of interest!!
This "buy and hold" strategy is the biggest con job ever perpetrated on the American investing public.

Did you notice the profession of the person who was advocating "Buy & Hold"?

What a surpise, he is a strategist/ mutual fund manager.

Buy and Hold is NOT in the investors best interest it is in the asset management industry's best interests.

If the mutual fund industry really believes in " Buy & Hold" let's align
our interests, while we are "holding"

How about, the money managers get paid
nothing when their fund does not beat
their respective index?

After all, if you can't beat your index,
what are we paying you for.??

J. G. Hospel

July 3, 2009 1:03 PM

I buy on dips, and when I buy I look for healthy growing COs with earnings in site and hang on until they go up fast, and when they get ahead of them selfs, then I sell to cash in on the gains. I start over again with another stock when it is in its lows. Technical Analysis helps to find them and also to tell me to see the highs.

GloomBoom.com

July 3, 2009 3:21 PM

I just read a blog that showed that the S&P was above 1400 in 1999. Yesterday it was at 896. Buy and hold doesn't look so good right now!

get serious

July 3, 2009 7:50 PM

Simple answer: only for the mutual fund companies.

hock

July 4, 2009 3:35 AM

Buy and hold is fine, but not before the "Great Depression" of stock market is over which usually happens every 70 to 80 years and last about 10 years. The last one was 1929 to 1942 lasting 13 years. We could be in a midst of one of these "Great Depression" markets. This one started on March 2000 (2000 is earliest count, later count will be 2007)and should last till 2013 based on the previous cycle. Still time to be cautious for buy and hold strategy.

Don

July 4, 2009 12:52 PM

American workers' share of GDP has been declining for a long time now, so the economy may be overdue for labor claiming a larger share. Perhaps top executive pay has carved away too much from shareholders' returns. In any event, I now look more closely at dividend yields when buying stocks, and probably will be more inclined to pass on stocks of companies that pay no or low dividends in coming years.

david simon

July 4, 2009 6:14 PM

Is not investing in mutual funds a similar way of buy and hold? Even though the funds may buy and sell a stock the premise of the fund is stated to be such that the philosophy of the fund is limited to the stocks which it buys i.e a financial firm or health care or Latin america etc fund. So in that case it is a buy and hold with in that particular bracket

FG

July 5, 2009 5:26 AM

More hindsight dribble from the media. Mike Stathis detailed the retirement crisis in his book America's Financial Apocalypse, written in 2006.

He predicted everything, including Fannie and Freddie collapsing and being bailed out. Much much more. But the media has banned him because they want to lie to you. You have all been fooled.

Be smart and start and bookmark his site www.avaresearch.com

read everything and you will see he is the leading expert on the economy and stock market in the world. Tell everyone you care about him. Check his track record. He predicted EVERYTHING.

Jackov

July 5, 2009 8:29 PM

For workers investing in 401Ks, buy and hold is not valid. The average career is five years. Unemployed workers often must cash out retirement plans. Buy and hold assumes decades of steady income to invest--a situation that will no longer exist for most workers.

M.A.

July 5, 2009 8:30 PM

The problem with 'historical data' is that it is pretty much useless in this case... the markets changed dramatically in the early 80's with the democratization of trading and the explosion of funds. Just take a look at the chart for the Dow, for example. Pretty much flat into the 70's and then the beginning of a huge roller coaster. For decades, the markets were undervalued... clearly not the case anymore.

DickT

July 5, 2009 10:24 PM

In general I would say yes but one has to monitor market trends and if you see a long term negative movement like we have the last two years then you should take action and lock in most of your profits. I think Buy and Monitor is a better term. By doing this I managed to minimize my losses and am now buying back in on market dips because I believe that the long term trend is up.

dt

Kennon Grose

July 10, 2009 5:20 PM

Mr. Stone makes a good point but the "buy and hold" concept is too broad to be an all encompassing investment stratetgy. When someone employs this strategy, there are many underlying characteristics which drive the returns.

1. Indexing is the path to achieve asset class returns
2. Indexing is the primary way to reduce investment expenses
3. Asset allocation is a tool for managing risk
4. Simplicity in execution is the way to achieve lowest possible costs

The Leuthold Group just published a study in June -- Exploiting Generational Anomalies In Stock vs. Bond Returns, June 2009. They noted two conclusions which fit with ensuring a focus on the equity asset classes.
1. The current stocks vs. bonds performance differential, over both very short and very long time periods, is at or near historical extremes in every timeframe examined. This suggests that we are at the threshold of a major (but temporary) market anomaly.
2. Historically, periods when bonds have outperformed stocks over very long timeframes have proven to be very opportune times to shift out of fixed income assets into equities.

All of this fits with a buy and hold investment strategy.

greg hudson

July 27, 2009 1:45 PM

Numbers 1 thru 3 can be employed in an Actively Managed scenario. Execution is less simple and there are costs, but the risk-management savings will out-weigh the drawdowns in bear markets. Additionally, the Leuthold Group's study may indicate that now is an opportune time to buy - but this applies to buying in either an Active or Buy&Hold strategy.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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