Is Buy and Hold Dead?

Buy and Hold, Warren Buffett style. Is it still applicable in the current volatile age?

I would like to hope so but recently not so sure.

Can you buy a low cost index and forget about it for 15 years?

What strategy can a long term investor make in this crazy investment world of late? Must we all succumb to the world of trading?!!!

Yep! (to the last Q).

The key to buy and hold is your entry point price. If you can get in when it's cheap I dont see how you can lose long term. The problem is having the patience and knowledge to see a bubble, wait for the collapse and then jump in. I just wish I was in a position to after the last crash but I wasn't

This is really a question of correctly identifying sources of risk and return in the "market".

If I go to a commercial index provider such as S&P or FTSE, I am being led by the index provider as to what represents an appropriate definition of the "market".

However, the recent development of fundamental index funds reflects a recognition that there are other ways of looking at what represents an investible index.

For example, if I look at the performance of a globally diversified portfolio of small and value stocks since 1982, I get the following results in US$ to the end of April 2010:

1 year 57.22%
5 years 7.55%pa
10 years 12.88%pa
15 years 11.34%pa
20 years 10.86%pa
25 years 13.96%pa
since Jan 1982 14.86%pa

The S&P 500 had the following results over exactly the same period:
1 year 38.84%
5 years 2.63%pa
10 years -0.19%pa
15 years 7.66%pa
20 years 8.88%pa
25 years 10.46%pa
Since Jan 1982 11.29%pa

For reference the long-run return of the S&P 500 since Jan 1926 has been 9.86%pa

So, conclusion 1 is that buy and hold works and (on average) pays you about 10%pa
Conclusion 2 equities are risky, (see point 1 i.e. that's why you expect 10%pa)
and are prone to periods when they do worse than cash like the last 10 years (however, if they were guaranteed to beat cash then where would the risk be?)
Conclusion 3 by sorting stocks by their cost of capital (see Adam Smith Wealth of Nations) and not by what they make (sector) or where they are listed (country) investors can gain a higher expected return than some arbitrary definition of the market such as the S&P 500.

On average the premium an investor receives from investing in small and value stocks has been about 4%pa above the more traditional measure of the market.

No need for stock picking or market timing, no need for expensive trading strategies.

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I only buy and hold index trackers. I dont think the arguments have changed at all. But you should diversify with your buying and holding.

My only long term fear for buy and hold/index tracking, is that as more of the market, catches on and , switches to buy and hold, less of the market is ensuring that companies are priced fairly.

Hi Marc,

Top of the class, can I ask which tools you use for stock, index, etf sifting?

I might add that in volatile times 'dollar cost averaging' or buying in to the type of fund, or ETF allocation you deem appropriate in stready monthly/quarterly/or yearly amounts is shown to deliver better results than one off bets into same for market timing- which most intelligent investors view as a mugs game.

From my research, i came across academic papers, that said, if you have a lump sum, DCA on average gives a lower return (and hence has lower risk). This makes sense, as normally time in the market is the largest predictor of return, and if u DCA a lump sum, it will take some time to get all your capital in the market.

of course, risk and return are linked as usual, if you put it all in at what turns out to be an expensive time, you will not do as well, but if you put it all in at what turns out to be a cheap time, you will do much better. if you dca it, you will get a lower return, but you will have had less risk.

If you dont have a lump sum and you are saving from your income each month, then DCA is good, but then it should really be called "investing in an index each week from my spare income"

SPC100 said:

From my research, i came across academic papers, that said, if you have a lump sum, DCA on average gives a lower return (and hence has lower risk). This makes sense, as normally time in the market is the largest predictor of return, and if u DCA a lump sum, it will take some time to get all your capital in the market.

of course, risk and return are linked as usual, if you put it all in at what turns out to be an expensive time, you will not do as well, but if you put it all in at what turns out to be a cheap time, you will do much better. if you dca it, you will get a lower return, but you will have had less risk.

If you dont have a lump sum and you are saving from your income each month, then DCA is good, but then it should really be called "investing in an index each week from my spare income"

Click to expand...

I totally get the index, lowest cost over the longer term strategy.

However we are living in a 'secular' bear market that started in 2000.

Such bear markets last on a historical and empircal basis 15-18 years or so. On this basis I don't feel 'buy and hold' the index to be a good strategy at present.

It will come good when we next enter a long term secular bull. I don't think we are there yet.

On this basis I feel a lot of the index consists of trash growth stocks (i.e. the banks). The bear need to fully play out before the indexes become a buy.

I currently prefer the 'defensive' high yielding mega caps over the index as a whole. On this basis I prefer to be selective and pay a bit more in management fees in order to achieve the correct high yielding defensive stance over buying the index as a whole, despite its lower cost.