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Is Buy and Hold Stock Investing Dead?

Buy and Hold

Investment philosophies are as plentiful as grains of sand in the sea. Some are good, some aren’t so good. Few have been as staid as the buy and hold stock investment strategy. I am using the term “stock investing” loosely as it can apply to stocks, mutual funds, bonds…you get the point, I am meaning pretty much anything within the market landscape. What makes buy and hold investing unique is that by being a buy and hold investor you don’t care about market swings. You’re going to hold on to your stocks for the long haul expecting to get a decent return. While this may work at times, the wild market swings the last few years have called into question the validity of buy and hold investing.

Where Did Buy and Hold Come From?

Buy and hold investing has not been around for a terribly long time. The term was first used by Burton Malkiel, in 1973, in his book A Random Walk Down Wall Street. He believed that stock prices are random and not influenced by events in the past. There are also a number of buy and hold investors around today, namely Warren Buffett. Mr. Buffett has commonly been quoted as saying his holding period for a stock is forever and I think few can touch Mr. Buffett’s investment prowess. Most of us don’t have the funds at hand to take on the holdings Mr. Buffett can, but can we still be an effective buy and hold investor?

What are the Advantages to Buy and Hold?

There can be numerous advantages to buy and hold investing, including:

  • It is cheaper due to fewer commissions paid
  • It can be more tax beneficial as the IRS taxes long term gains at a lower rate
  • Less stressful as you’re not beholden to market swings

A tried and true buy and hold investor will say that these advantages make the buy and hold strategy a good one to use. I love the fact that I would pay lower commissions by using the buy and hold strategy. What frugal person would not want a way to lower their costs? Add to that possible tax savings which allows me to keep more of my money as opposed to giving it to Uncle Sam and I am a happy camper. Perhaps the biggest selling point of all is the decreased stress from having to watch the markets and making snap decisions.

…And the Disadvantages?

The biggest selling point to the buy and hold strategy could also be the biggest disadvantage. I commonly hear the buy and hold strategy being mocked as the buy and hope strategy. Which, when looked at logically, does hold some water especially in today’s market climate. The opponent to buy and hold would point to the wild market swings as to why buy and hold investing is dead. I am sure that people who were holding stocks such as Lehman Brothers, Bear Stearns, or General Motors would now say that you can’t just buy and hold. Anyone who was simply following a buy and hold mentality in the Summer and Fall of 2008 unfortunately lost their shirts, and much more for that matter. All of this points to the biggest detractor of buy and hold investing, and that is it can kill your portfolio if not watched appropriately.

What Do We Do Now?

So, is buy and hold dead? Unfortunately, there is really no simple answer. In short the answer is both yes and no. In the truest sense, in today’s market climate, you’re playing with fire by simply following the buy and hold philosophy to the nth degree. That’s not to say you can’t invest in certain stocks for the long haul, but it can’t be done blindly. Today’s market climate requires us to be in the know on our investments and ready to act if need be. On the other hand, buy and hold is not dead because you can’t simply be tied to the market swings and make decisions based off of what everyone else is doing. If you do that, you’re very likely to lose out on gains you’d realize if you had a stronger investing stomach. In the end, the point I take from this is the importance of having an investment plan and sticking to it. If you love buy and hold, great, but do so with your eyes open. If you hate buy and hold, fine, but don’t chase after gains to spend a small fortune in return.

 

The market has taken a toll on many people’s investments, those who espouse buy and hold and those who don’t alike. Do you follow the buy and hold strategy, or are you more short term in your investment strategy?

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Photo Courtesy of: Myles Davidson

 

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and would love to help out if you have the need. If you're wanting to grow your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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34 Comments

  • Pauline says:

    Less stress is definitely the best part of buying and holding, if you can keep from watching it every other day! You can also average your buying costs buy buying regularly. Yes buy and hold is simple but how many people can outsmart the market by actually buying low and selling high? I like index tracker funds because you are investing in a wild variety of stocks, again removing yourself as a decision maker, and the market swings are less likely than with a single company stock. You can quite safely buy and hold those for the long term.
    Pauline recently posted…Understand the impact of money decisions with PlanwiseMy Profile

  • I think the buy and hold stock investing strategy tries to oversimplify the economic realities we face. The government – both the US and others across the globe – are constantly manipulating interest rates, money supplies, and changing tax policy. You can buy and hold stock forever, but there is no guarantee that your stock in certain companies will be worth anything in the future. Myspace went from a billion dollar company to a $30 million company within just a few years. Companies come and go. Diversification of assets is key if you plan on holding them for the long term, as well as having hedges set up in case things change “unexpectedly.”
    DC @ Young Adult Money recently posted…Will Facebook and Zynga’s Decline Hurt the Housing Market?My Profile

    • John says:

      I would tend to agree DC. In the current climate, well the climate of the last five years really, just buying and hoping will get you in trouble. You bring up a great point about companies that lose a considerable portion of their value in such a short time. I’ve seen too many people who just left their investments thinking they were fine because they invested in stock X. In the end, investing in today’s climate really requires us to be informed and ready to act if need be.

  • The only way it is still somewhat valid is if you dollar cost average your position. Even then you still have a lot of downside risk and a volatile day if you don;t have a stop loss set.

  • It really is a tough one. I have bought a held all my investments so far (which isn’t much), and it has only grown slightly over the last 10 years. But, for me, I have not put in the time to research and watch the markets to see when I should be getting in/out of things.
    Jacob @ iheartbudgets recently posted…Monday Money TipMy Profile

    • John says:

      It can be tough Jacob. I think that buy and hold has be touted as the way to go if you’re investing, especially if it is for things like retirement. The thing is that that is not always the case. There’s a balance to be had between buying and holding and trading, it just takes time to determine which is best for you.

  • Veronica Hill says:

    Something is wrong with me today. I read “Investment philosophies are as plentiful as grains of sand in the sea. ” as “Investment pedophiles are as plentiful as … ” LOL. Anyway… I bought some stock a few years ago, needless to say it was a very poor choice and it tanked 75% of its value. Instead of selling off I kept it and kept it, and kept it… you get the picture. It’s now valued at 5% of what it used to be. I guess the “buy and hope” philosophy didn’t hold out too well for me.
    Veronica Hill recently posted…Why I Will Never Pay $350 for a Pair of SunglassesMy Profile

    • John says:

      Lol. :) Now THAT would make for an interesting, if not disturbing, post!

      Anyway, we all get caught in the trap of thinking “it’ll come back up” and not choose to act. I know I’ve been guilty of that choice. The thing is though…I’d rather lose 25% of something and still get something back as opposed to losing 90% and getting little back. It can be difficult to know when to act, which is why having an investment plan is key.

  • DebtsnTaxes says:

    I think the buy and hold strategy can still work but you have to understand what you are investing in. I’m more of a short to midterm trader as I think the global economy is ruined. I think people that buy to hold and never check on their investments are crazy. There is so much that happens on the global scale that can totally change a company, which could go against the real reasons you invested in them in the first place. Don’t try to time the market, but also don’t forget where the market is at in relation to the economy we live in.
    DebtsnTaxes recently posted…Stay-At-Home-ParentMy Profile

    • John says:

      I agree that the global economy is in the crapper and you have to be more aware of what your investments are doing. I’ve spoken too people before who just throw their money at some stocks and haven’t looked at them for over ten years. That just makes no sense to me. I think a lot of it comes down to being aware of what’s going on and being ready and willing to act to protect your investments.

  • I tend to think “buy & hold” became the mantra for individual investors because the mutual fund industry promoted it for decades. Buy & Hold is good for Wall Street’s business; whether it’s good for individual investors is a wholly different question which is not much on Wall Street’s radar, imo.

    Like most rules of thumb, a blind application of buy & hold or completely discarding the concept are both probably going to hurt the individual investor. One has to be willing to do the work required to manage investments, or else stay away from risky investing. Buy & Hold is probably more appropriate for a very broad-based, low cost mutual fund. But it’s completely inappropriate for investing in individual stocks or niche funds or commodities.
    Kurt @ Money Counselor recently posted…Charitable Contributions and TaxesMy Profile

  • John says:

    I couldn’t agree more Kurt. Investing takes work and time. You don’t have to be a pro at it, but a little homework can carry you a long way.

  • I agree with your analysis. But, buying and holding was better than buying and panicking back in 2008 and 2009. I heard of a lot of folks who sold out at significant lows. We though our companies were still sound and held on. We’ve been rewarded by a return of value.

    That said, we have sold losing positions… if the stock or the company isn’t performing over several months or years we chuck it for something else.
    Marie at Family Money values recently posted…Grandma Rie’s 2012 Money CampMy Profile

    • John says:

      I totally agree Marie. When you’re panicking, then you more than likely will not make a wise decision and end up selling at a significant low. I’ve spoken to too many people who did that very thing and have ended up losing out on the returns that you’ve experienced.

    • DebtsnTaxes says:

      That’s where the whole buy the fear and sell the greed thinking comes into play. There were so many awesome deals back then because everybody was panicking. If you took the time and sorted through companies that had a good chance of recovering you could have made a killing. If only we could go back in time.
      DebtsnTaxes recently posted…To Pay Down Debt or To Invest?My Profile

      • John says:

        I totally agree. I remember telling my wife that it was like her favorite store was having a 75% off sale on all her favorite items. When people are panicking, that’s when I like to find what’s good to buy.

  • I’m not one to change that often, so I try to invest in broad index funds and rebalance annually. It is always hard to choose funds, let alone individual stocks. I did buy a little bit of Walt Disney because we seem to support them anyway with my daughter and all things princess.
    Kim@Eyesonthedollar recently posted…Being a Boss, The Good, The Bad, and The UglyMy Profile

  • I followed a buy and hold strategy through the entire financial collapse and am still holding. My investments are currently worth more than they were right before the market tanked. In order to understand buy and hold correctly, you have to invest in broadly diversified funds. You can’t buy Facebook or Google today and expect it to still be chugging along 50 years from now. If you plan on investing in individual stocks, then you need to keep up with them or there is a good chance you will lose your shirt.

    You also have to focus on the end. What happens today or next week in the market does not matter. The market can be as volatile as it wants to be. It doesn’t matter with buy and hold assuming you haven’t reached your end goal time frame. The recent past in the market has proven just that. If you bought and held through it, you are where you were before, if not better. If you tried to time the market, you may have made out OK, but most locked in their losses and never got back in. And if you did time the market right, the odds are against you for doing it on a consistent basis. 80% of fund managers can’t beat the market on a regular basis. I don’t even waste my time trying. I just take what the market gives.
    MoneySmartGuides recently posted…Increasing Your Odds for Successful InvestingMy Profile

  • John says:

    You bring up some great points Jon. Many who sold out at our near the climax of the collapse locked in steep losses that will be hard, if not impossible, to earn back. I agree that you have to have a view past today, in general, of your investments in the market. The market is so heavily led by emotion that you’ll just end up harming yourself if you jump ship with everone else.

    That said, I completely agree that if you invest in individual stocks, then it’s a must to stay in the know so you don’t lose your entire investment.

  • Savvy Scot says:

    Less stress is always good.. means that you can go away on holidays and not have to worry about checking your stocks on a daily basis!
    I have a sweet 2 for 1 share scheme with my employer. The UK have a nice tax free incentive – So long as I leave the shares in my account for 5 years before selling.

    I guess it all depends on how many years you are looking to invest and your risk profile!
    Savvy Scot recently posted…Can you trust a sole trader without professional indemnity insurance?My Profile

  • John says:

    You’re right on there Sir. I think the length of time and how much risk you can stomach are key. Sounds like you’ve got a pretty nice set up there.

  • Cat says:

    I’m a buy and hold girl. I don’t pay enough attention to the market to buy and sell constantly! :)

  • I’m more of an index fund type investor but if I were to day trade, buy and hold would be the last thing I would be doing to try and beat the market.

    Buy and hold works though when you have a long investing horizon. Just sit back and enjoy the average return of the market.
    harry @ pf pro recently posted…Reader Question: Investing in Real Estate Without a Down Payment, What is an REIT?My Profile

    • John says:

      Index funds can be great. I tend to fall somewhere in the middle. I don’t have the time, or stomach, to day trade but would not really consider myself a typical buy and holder. That said, it is vital to have a long term view of things when it comes to investing.

  • Leo Cesna says:

    The safest solution for traditional “Buy & Holders” is “Position Trading”. Unlike Day Trading, Position Traders are only concerned with long term trend changes. We look for the game changers using similar techniques as the day traders only on a wider scale. Think annual and monthly charts vice hourly charts. It’s not as “sexy” as day trading but it’s sure nice to sit on the sidelines while everyone else is getting hammered in a nasty down turn.

    Position traders look for the exit signs that are triggered in the early stages of the “Dot.Com” crash and the “Great Recession” as well as the minor bear markets. By exiting the markets when things begin to get rough you can avoid a lot of pain and agony.
    Leo Cesna recently posted…Am I Saving Enough?My Profile

    • John says:

      Good point Leo. It sounds to be a more extensive, or longer term view using Technical Analysis. I can see how that would be a benefit in a minor downturn when Day Traders might be jumping ship. Thanks for stopping by!

  • Carlos Sera says:

    For a lot of people, @Harry excluded, Buy and Hold might was well be a unicorn. We all engage in market timing. But, if you are an indexer and can sit through the tough times, you’ll be fine. Know that you will have large drawdowns.
    Carlos Sera recently posted…Newly Released Tale – A Transformative TaleMy Profile

  • Buck Inspire says:

    Terrific points John. I was a buy and holder, but am trying to be more proactive as the lost decade did not sit well with me. Recently I started chasing stocks for gains and ended up losing a small percentage. Basically I would have been better off doing nothing. I’m trying to find my sweet spot. What do you practice?
    Buck Inspire recently posted…American Express Small Business SaturdayMy Profile

    • John says:

      Thanks Buck! I would consider myself a reformed buy and holder. I think what can tend to get lost is that long term is generally of utmost importance. So, I really don’t follow the buy and hope mentality, but I also don’t jump when things are going down. I try to stick to my investment plan as much as possible so as to avoid making silly mistakes.

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