Is Buy and Hold Dead?

 | Apr 08, 2014 | 2:45 PM EDT  | Comments
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Since the most violent market selloff of our generation in 2008 to 2009, every vocal investment strategist has written the obituary for the tried-and-true buy-and-hold method of investing.

Is it true? Could that single event have changed every concept of investing that we held so dear for the previous 200 years of stock market history? Is computer-driven trading and constant rebalancing of one's portfolio the only way to make money now?  Let's take a look.

Towards the end of 2007, the stock market was trading at all-time highs and everything was looking up. Where were all the money managers and analysts advising people to take some money off the table and wait for a pullback to re-invest? Human nature tells us to buy stocks when things look great and to panic sell when things look horrible. Human nature is our worst enemy when it comes to investing. The buy-and-hold strategy takes human nature out of the equation.

Let's assume you put new money to work at those all-time highs and bought the 30 stocks that now make up the Dow Jones Industrial Average. How would you have done?

With the exception of just six stocks -- Cisco  (CSCO), General Electric (GE), Goldman Sachs (GS), Merck (MRK), Pfizer (PFE) and AT&T (T) -- every other stock is trading above the high-water mark it made in 2007. 

Some stocks have amazing returns of more 100%, like Home Depot (HD), Nike (NKE), Disney (DIS) and Visa (V). Others have very respectable returns of between 40% to 60% like American Express (AXP), Chevron (CVX), Dupont (DD), IBM (IBM), Johnson & Johnson (JNJ), McDonald's (MCD), 3M (MMM),Travelers (TRV) and Wal-Mart (WMT).  

Other stocks with more modest returns in the 10% to 20% range include Boeing (BA), Caterpillar (CAT), JPMorgan Chase (JPM), Coca-Cola (KO) and Verizon (VZ). These returns would look even better once you calculate dividends into the mix. Even the six stocks mentioned that are not trading above their previous highs in 2007, if you take into account an average dividend rate of 3% and reinvestment of those dividends, would have a positive return on those as well.

Investing is totally different from trading. This is not a race to the finish line. Every person has his/her own set of goals and there is always more than one way to get there. 

My investment strategy and advice has sometimes been criticized as being overly risk averse. All investing inherently has risk, so I don't agree with that evaluation. Here is my advice (for what it's worth).

Diversify. Buy stocks that represent different sectors of the economy. Buy the leading company (or No.2) in each sector (preferably one that pays a dividend and re-invest that dividend). Don't sell unless the environment for the product or service they provide changes for the worse.

Will you be the talk of the party when they are discussing the latest sexy momentum stock that doubled in value over the last three months. No. But neither will you be the talk of the party when all the momentum comes out of those high flyers and you are left holding the bag.  

Over the last few weeks we have seen some air being let out of those high flyers. Google (GOOG) is down 15%, Priceline (PCLN) is15%, Tesla (TSLA) is down 20% and Amazon (AMZN) is down 20%. Is there a place for more risky momentum movers in every portfolio? Absolutely. But with the fashion stock du jour, entry points are key.

To be fair, entry points make a significant difference in annual returns, so market selloffs should not be viewed as bad things for the long-term investor.

There, I said it. Buy and hold. It has worked incredibly well for Warren Buffett. It has worked for me. It will work for you.  

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