Smart Reasons to Save, Use and Invest Money

Is Buy And Hold Investing Dead?

401k History
401k Performance History

 

On TV and other channels of financial communications, I keep hearing that the “Buy and Hold” strategy is dead or no longer works, but I beg to differ!

The chart above is my 401k balance over the past 8+ years, and as you can tell, my overall balance has almost doubled (97.6 %)!  Now granted my 401k investments are in mutual fund which is bit different from buying “blue chip” stocks, but I think most investors do buy and hold mutual funds instead of individual stocks, so hearing such messages adds to the confusion.

Note in the chart above, that the reason I have only 8+ years of data is because that is as far back as I can go with the 401k company that provides information about my 401k balance.  If the data went back to 2000, my return would even be higher.

Buy and Hold

Buy and Hold taken as a mindlessly buying and holding stocks without thinking, is not the best approach.  But with mutual funds, it’s different!  When you buy a mutual fund, there’s (in theory at least) a smart fund managers running the fund for you or an index that weeds out the poorer company performers.  So you are paying them to do the thinking/indexing for you.

Buy and Hold Deviations

At my 401k’s core investment philosophy is the “Buy and Hold” strategy!  But I have taken some liberties with my 401k account.  For instance, during the downturn of “The Great Recession“, my first deviation was that I bumped my 401k contributions to the maximum that was possible.  So I was able to buy some shares in the mutual funds in my account at a deep discount (good deal!).  This is a stealthy way of buying low (aka timing the market)!

A second deviation from the “Buy and Hold” strategy is that I like to play one of the mutual funds that’s in my account occasionally.  By play, I mean trying to buy low and sell high (again timing the market).  While this isn’t advisable for most, I know this one particular mutual fund very well!  In fact, I know it so well that I’m able fairly accurately guess what direction it takes the majority of the time.  This is the wild part of my 401k investment (still very conservative though) and just a very small part of my portfolio that I use to provide a bit of extra interest for myself so that my 401k is more fun for me.  This approach probably has raised the overall cumulative value of my entire portfolio by a mere 1 or 2% at the most over these past 8+ years.

Not Following the Herd

During the downturn in 2008, even some of the financial gurus lost faith and were telling people to move to cash.  Such a move is very anti-“Buy and Hold” strategy.  Perhaps this is why the same group of “financial gurus” say that the “Buy and Hold” strategy is dead?!

I’m not going to mention names, but there were a few highly influential financial gurus that were telling their audience to sell their stocks and other financial investments practically at the market bottom!  It was one of the few times in life where I was yelling at the TV (very, very rare),  directing my anger at one of the “gurus”, yelling that this was the worst time to move to cash!  While the TV guru didn’t heed my advice, I felt better!

Champion investor Warren Buffett believes that the “Buy and Hold” investment strategy still has legs!  Perhaps that’s why he is making money instead of providing financial advice…  How can the financial community go against the best evidence of a “Buy and Hold” strategy via Buffett when the world’s greatest investor says that it work?  Isn’t that kind of telling former boxing champ Mike Tyson that he can’t hit hard and that it’s impossible for him to knock someone out?

Do you think Buy and Hold is dead?  What’s your take?

 

-MR

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27 Responses to Is Buy And Hold Investing Dead?

    • Yes, and really unless you are in decent mutual fund, you’ll have to monitor those companies. This way you’ll make sure the story hasn’t changed for them.

      On something changes that makes a company no longer as attractive, you should get out of that stock.

  1. I don’t have any investments at the moment but my investing strategy revolves around buy and hold. I don’t believe in being able to time the market all that well because the markets are so irrational. I’m in it for the long term so a couple minor price deviations shouldn’t matter all that much.

    -Ravi Gupta

    • The investment markets are what football games are to other! I really enjoy rooting for my favorite stocks.

      That said, you shouldn’t get to attached to your stocks!

      Since you aren’t in riskier investment yet, perhaps you could try some stock simulation online sites. That way you get a bit of a taste for what it feels like (if you want to invest in stocks, if not go with mutual funds or etfs someday) and the opportunity do develop your own strategies.

  2. I think Buy and Hold is the best strategy when combined with Dollar Cost Averaging! If you are still making contribution then you can keep buying when the market is low.
    My 401k looks quite similar to your graph. Nice job!
    If you stop contribution, then I don’t think Buy and Hold works as well. For example, if you retired 8 years ago and stop contribution, your graph would look quite flat.

    • I think my graph would continue to rise, but not nearly as quickly as with dollar cost averaging working in my favor too.

      So yes, dollar cost averaging is a very important part, no doubt!

      A 401k plan is one of the greatest dollar cost averaging investment vehicle in my option. My employer’s 401k plan invests in investments every 2 weeks, it’s great!

  3. I don’t know if I am buy and hold, but I know I am not smart enough to time the market! I try to stay true to my asset allocation and dollar cost average into the market. Over all my portfolio is doing pretty well.

  4. Buy-and-Hold has been dead intellectually for 30 years now. The “experts” in The Stock-Selling Industry continue to push it because it’s a Get RIch Quick scheme in disguise and we all have a weakness for Get Rich Quick. Those who make money promoting Buy-and-Hold are exploiting a tragic human weakness for personal profit (I don’t think that most are personally aware that this is what they are doing, however).

    In practical terms, Buy-and-Hold is not yet dead but its popularity is certainly fading. There’s been a big change in people’s views about Buy-and-Hold since the stock crash. The next crash will be the stake through the heart that we all need to get our economy back on its feet.

    The good news is that we have 30 years of academic research that has been generally ignored because of how it discredits Buy-and-Hold. Once we settle down to serious discussion of what the research really says, no one is going to miss Buy-and-Hold. And, once we achieve a widespread consensus re just how dangerous Buy-and-Hold is, we will be able to give proper credit to the many Buy-and-Hold advocates who helped us all with their development of many powerful insights.

    Things have to get a bit worse before they can start getting better. But once they start getting better — Watch out!

    Rob

    • I’m still up 97.6% over the past 8+ years. If my chart above showed my return from 2000, it would even be a higher return (versus my annual 8.6% rate). So I don’t know if I can totally agree.

      I think may investors sell at the wrong points in time, and then buy when the market is already high. But that’s not a Buy and Hold Strategy.

      I do agree that there might be some funny business with speculators in commodities though!
      Just curious what strategy do you recommend?

    • I think it takes some thick skin sometime to stay with the buy and hold strategy, but as long as the DOW index and other indexes continues to climb to new records, it’s a good investment in my book too.

      Oh sure, sometimes it takes a few years, and in some cases longer. And it’s not guaranteed (look at Rome), it’s the best thing we have, especially if you are diversified.

      I’ll have to give it more thought later, but for now, my 401k graph tells the story that buy and hold is still alive and doing well.

  5. Great article. I think Buy and Hold is losing popularity because most people suffered through a gut wrenching recession. I like your moves of mixing buy and hold and some timing. You are up nicely which is good, but if you employed a full buy and hold strategy, you would also have been down 50%, too.

    Completely getting out of the market, with 20/20 hindsight was the worst move, but it really felt like the financial world was about to collapse. Gotta kill those emotions of panic.

    • I admit, the 1999 recession prepared me for this recession. I rode that one out too, but I didn’t and wouldn’t increase the amount that I contributed to that one.

      Quite honestly, I thought this one current one would last a lot longer. I was pleasantly surprised.

  6. I like buy and hold just fine, as long as the equity pays dividends, or the management of the company isn’t getting stupid on us, like Budweiser. I just finished listening to an interesting podcast on the rise and fall of the King of Beers, and how they managed to get themselves sold off to some foreign conglomerate with an insipid name like InBev.

    • Yeah, the Budweiser move was very sad to hear (this happened a while ago, Miller brewing isn’t domestic anymore either). American for sell, highest bidder wins…

  7. I don’t believe buy and hold is dead. This is a style of investing that some still adhere to. It’s not like original springle chips are no longer in demand because new flavors were introduced.

    I can stick with buy and hold if I get paid a monthly dividend in most cases.

  8. There has to be some type of balance and utilization of both.

    If you noticeably see the economy deteriorating, and things beginning to accelerate on the downside… then by all means sell!

    I’ve asset allocated this week to safer investments after a 7% ramp in my main fund YTD. I figure, why not lock stuff in. Not all, but some.

    Sam

    • Great add Sam!

      I’ve let my money ride for the past 10+ years, but I thinking my account has grown to a size that I want to start to rebalance my account! I would hate to take another 40% dip like in this past “Great Recession”.

      Currently, I’m mostly in equities, but I’m nervous about the end of 2011 so I too will rebalance sooner than later. Beside rebalancing is a good way to go about it, and most financial advisors back such a strategy.

      Thanks for the add! :)

  9. Nice that you gained 8.6% annually since 2003. Unfortunately, the price of gasoline went up from $1.72 per gallon to where they are now. The price of milk was $2.75 vs. $3.72 in Florida (although I am paying about $3 per gallon).

    Gains are nice but putting them in terms of purchasing power becomes more important when discussing retirement. The items that I consume will have a very large impact upon my lifestyle when I stop contributing and start drawing against my 401(k).

    This is why the CPI has little value for the average person. It is nice to know that inflation is low, but it doesn’t impact me at all when I have to purchase energy or food.

    I suspect that you would have to look at the cost of things that you purchase to determine if you really have gains from buying and holding because in the end, only purchasing power matters.

    • Very true, and with the Gov printing money like it’s monopoly money, soon monopoly money will be worth more (lol).

      What is a guy trying to get ahead financially to do though…

  10. This is why I really like retirement date indexed funds. They typically invest for the long term and change the types of investments in the funds as the target date gets closer.

  11. […] Some “financial gurus” and investor have started to claim that Buy and Hold investing is dead. Well Money Reasons shows how Buy and Hold has worked in his 401k, and reminds us that if Warren Buffet is doing it, then it’s probably alright in his post Is Buy and Hold Investing Dead? […]