Abandon “Buy and Hold” at Your Peril
“Buy and hold” investing is dead.
That chant has been getting louder and louder over the past year as global markets went into a free fall, before their recent rally.
Markets have changed profoundly, the reasoning goes. Investors who simply bought stocks and held them saw their portfolios decimated in the bear market. In volatile markets like ours, where information spreads instantaneously, investors need to be more active—even become traders—using brand-new instruments like exchange traded funds to hedge their portfolios just like the institutions do.
The evidence shows, however, that this argument is specious at best and self-serving at worst. And ironically the ideas are gaining currency just as global markets may have hit bottom. Investors who follow this questionable advice now may wind up making things worse for themselves.
And by pushing this strategy, advisors are overlooking the real problem: Going into the bear market, many investors were insufficiently diversified and had far too much of their money in stocks, as we discussed here last week.
Still, after circulating around independent advisors and newsletter writers for the last year, the “buy and hold is dead” theory has hit the mainstream media big time.
“Many advisers are questioning their faith in long-standing investment principles, such as controlling risk by building diverse portfolios,” The Wall Street Journal reported recently. “Some have ramped up their use of opportunistic trading to try to profit from short-term rallies and sell offs.”
And late in May, The New York Times chimed in: “A new mentality has emerged among some investors, who are rethinking the traditional approach to asset allocation. The upheaval in the markets and in the broader economy has led them to question long-honored principles of investing and to sound a death knell, at least for now, for the buy-and-hold mind-set.”
Indeed, “buy and hold” has few defenders now—maybe only Warren Buffett, John Bogle, and a few old-school value managers and advisors.
But that’s pretty typical near the end of bear markets. “Everybody said ‘buy and hold’ was dead in 1973 and 1974,” recalls Dan Sullivan, editor of The Chartist newsletter. “But it was the best time to be a buy-and-hold investor.”
And in a recent compelling commentary in the Financial Times, Dennis Butler, president of Centre Street Cambridge Corp. in Cambridge, Mass., wrote: “The present situation is not unlike the early 1980s, when 15 years of stagnation caused equities to fall out of favor.