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I fully intended to write an article bashing the buy and hold strategy, and indeed part of me still wants to write such an article. There is much to bash. I even had a title prepared: Buy and Hold Didn't Die, It Never Really Lived. (Cue the YouTube video of Braveheart)
But alas, it is difficult to confirm the death of buy and hold investing when so few of its defenders actually mean the same thing when they defend it. There are several buy and holds. Here are some samples:
- An article found on InvestorPlace suggests that underweighting certain sectors and changing 25% of the stocks in one's portfolio each year is a version of buy and hold investing. (Is that really holding?)
- An article from Motley Fool says the goal is to find a stock that you "never, ever" need to sell. (How does one make money with that strategy?)
- An article found on Seeking Alpha talks about understanding secular and cyclical bull and bear markets. (Why? To better time the market?)
- Finally, an article from Forbes online drops the names of heavy hitters like Grantham, Siegel, Malkiel, Bogle, and--cue music--Buffett to support sticking with buy and hold. (But don't all those guys have different strategies?)
I'm not sure which buy and hold strategy to bash. But as I was doing some research, I realized it's not so much a specific strategy that bothers me, it's the conventional wisdom that bothers me. Conventional wisdom is dangerous because it is what the masses take for granted, it is the lowest common denominator of understanding. In the form of conventional wisdom, the buy and hold strategy has become a soothing crutch for the average investor, a call to inaction, a warning against straying from the path of pseudo-scientific statistical outcomes.
Don't try to time the market, it can't be done. It's better to do nothing! Just buy and hold. Everything will be fine in the long run. Assume 8% annual returns and plug it into the retirement calculator. Above all, never panic. Do not to interrupt the wealth machine with your simple emotions.
When I think of buy and hold as conventional wisdom, I think of my mother. Like most people, what she knows about investing comes from pamphlets received from kind and well-meaning financial planners. If I were to ask her what buy and hold means, she would probably say that it means you are supposed to keep putting money into stocks (or, more likely, mutual funds) and hold onto them because over the long term, the stock market always goes up...eventually.
You may say this is a caricature of buy and hold, but this is how conventional wisdom works. When the market goes down, casual investors consider it outside the norm and become confused, nervous, or even angry and helpless (What should I do? I can't sell, can I?). A few might become overconfident and throw good money after bad. They trust the strategy and its familiar simplicity, and they are not often presented with alternatives. Worst of all, they are not taught risk management. Why have a stop-loss when the market always comes back?
When buy and holders speak of risk, they are usually not referring to risk at all. They speak of missed opportunities. They trot out charts and studies that show (as always, over the long term) the dangers of not being in stocks, with relative performance (how one does compared with the S&P 500) as the measure of success. However, in this day and age when savings and retirement funds are invested in the markets, when the lines between saving and investing have been blurred, shouldn't people be aware that there have been long periods of time where markets go down or sideways? Shouldn't people be shown a chart of Japan's Nikkei 225 from November 1989 to today?
That should make you think. It's Japan, not Zimbabwe. Now of course it is absurd to say that the past returns of the Nikkei over a certain period of time are indicative of future results (disregarding the similar storyline of a real estate bubble, extremely low interest rates, and a deflationary environment). But it is just as absurd to use buying Microsoft in the 80s as an example of a buy and hold strategy. The truth is that past returns are not indicative of future results, it's more than a disclaimer, and no amount of academic studies referencing the market's history can change that. We can use history as a guide, but that's not risk management. Risk management isn't planning for the norm, it's protecting yourself against the extreme or unusual (read some Nassim Taleb, please).
You may now be thinking that I've decided to just bash buy and hold after all. Not so. (Okay, I did get some shots in.) I respect that some investors, using their own version of a buy and hold strategy, have been quite successful. But some have been unsuccessful, perhaps by picking the wrong stocks and holding them to near zero (yes, smart people have done this). In the same way, there are successful and unsuccessful short term traders who attempt to time the market and use a variety of methods.
My point is not that one method of investing is better than any other. I have my preference, which fits my personality, risk tolerance, time horizon, and skill set. My point is that buy and hold has become conventional wisdom as the "right" approach for the casual investor, whereas day trading has become synonymous with risky behavior. The truth is that while both approaches have risks, only one of the approaches readily acknowledges that risk. So which is more dangerous--the devil you know, or the devil you are led to believe does not exist?
[Simultaneously posted on my personal blog at www.thestocksurfer.blogspot.com]
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