| 06 January 2010
If you have been listening to the television or read any business publications in the last month, the message you have in your head is that a buy-and-hold investment strategy is dead. As the market started to melt down in the fall of 2008, all equity assets (and some bonds) dropped in unison (for those of you who like investment-speak, correlations went to 1). Diversified portfolios cannot escape a seller's market and we saw that in late 2008 and early 2009. But that six-month time frame does not mean that buy-and-hold is dead.
In the January/February 2010 issue of Journal of Indexes, John Bogle (founder of Vanguard) was interviewed about this exact question - is buy-and-hold dead? Mr. Bogle asked an interesting question back, "'Buy and hold what?'" The idea of buying a stock and holding it forever makes no sense - just look at Enron. But assessing your risk tolerance and age and then buying a mix of assets that represent equities, bonds and cash puts you in a great position to hold the right things. Mr. Bogle points out that we are all holders of the same stock market - we trade with each other which means one person has to win and one has to lose. Trying to outsmart each other will only lead to higher trading costs and lower returns.
Buy-and-hold reflects a strategy that establishes ground rules around when you need your money. Assets required for shorter-term spending should be in cash and bonds while longer-term needs can be in equities. Thus, as you spend money in retirement, you will need to sell some equities and replenish cash and bonds. This is rebalancing in its simplest form. Buy-and-hold does not mean buy-and-go-away. Formal rebalancing and ongoing review of your risk tolerance and goals will adjust how much you have in equities and bonds, but it never leads to not owning those assets. Thus buy-and-hold is alive. It is the disciplined answer we need to maintaining a long-term portfolio meant to fulfill long-term results.
To argue that buy-and-hold is dead is to argue that human behavior always does the right thing. That we know is wrong because plenty of people sold out of the stock market in February, 2009 as it was bottoming. Those people allowed fear to be their plan and their short-term response guaranteed lower returns. Buy-and-hold keeps you in the market so you can experience the returns that only patience can bring.
If anything, a buy-and-hold strategy is the antithesis of our culture. Our culture continually sends the message of instant gratification. But in investing, there is nothing instant. The next time you hear someone demonize the buy-and-hold approach, be wary of what they are selling.