Buy and Hold: Kaboom!

From Michael Gibbons:

“The S&P 500 (SPX) closed on 5/22/2000 at 1400.72 and closed on Friday 5/28/2010 at 1089.41. This is a 22.2% loss in value in ten years of buy and hold investing not allowing for inflation. This means a buy and hold investor has lost 22.2% of their money plus another 20% for inflation — a 42% haircut. It looks to me that a lot depends upon timing as to whether buy and hold is a viable investment strategy. For the past ten years, buy and hold has been a big loser as it has been in many other time periods in history. The period of history the buy and hold advocates don’t want you to know about is 1929 to 1954. The highest close for the Dow was 381.17 on 9/3/1929 before the beginning of the great bear market, and it took 25 years to get back to ‘even’ on a nominal basis (not counting inflation). The Dow closed above 381 for the first time on 11/23/1954 after the 9/3/1929 high.”

Mark Twain once said:

“A lie can travel halfway around the world while the truth is still putting on its shoes.”

The lie of buy and hold has traveled much farther than halfway around the world!

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8 thoughts on “Buy and Hold: Kaboom!

  1. Picking arbitrary time periods to prove something worked or worked not doesn´t help those 99% of peolpe who invested at a different point in time.
    The performance calculator at the JWH website is an interesting tool.
    Let´s see, what about the last 15 years? JWH Financials & Metals up 144%, S&P500 up 202%.
    Now lets compare to boring Long Bonds and take a uhh completely reasonable 13 year period: JWH Financials & Metals up 88%, Barclay US Long Government Bond Index up 160%. What do those numbers prove?

  2. David-

    Changing instruments and time periods isn’t the point. The point is that if you are just plunking down your money with a buy and hold strategy then you are doing nothing more than gambling. Ask the people who were ready to retire a couple of years ago before the market crash what they think of buy and hold.

  3. Well, i know that a simple buy and hold strategy is no strategy at all. The point is that it matters when you buy or sell an asset class. Periods of outperformance are usually followed by periods of underperformance. If you sold stocks and bought a Bill Dunn or JWH fund in 2002 because you were disappointed of the performance of the stock market, you would be even more disappointed now, as the stock market outperformed those funds since 2002.

  4. The logic behind investing in a trend follower is essentially the same as investing in coca cola stock. You intend to buy a viable business model that can weather draw downs and come out stronger than before. If you´re sure you have found a viable business it makes sense to buy in draw downs, because you can expect a better return than when buying at tops.
    Personally i just invested in a trend following fund, because i believe the business model is intact, despite the performance of many trend followers being pretty ugly over the last few years.

  5. Buy and hold will never die as long as the media and mutual fund managers keep pumping it as gospel. It is quite unfortunate that the masses fall prey to this propaganda.

  6. david Says: The logic behind investing in a trend follower is essentially the same as investing in coca cola stock. You intend to buy a viable business model that can weather draw downs and come out stronger than before.

    David… if you really believe this then you have no idea what trend following really is. You’re smart to give your money to a trend following fund manager… however, if your trend following fund manager’s performance has been “ugly” the past few years then you need to find a new fund manager!

  7. Ok, maybe it´s an exaggeration for you hard core trend followers to compare coca cola with trend following.
    The point is that you better buy your trend following fund on dips, because you get more return for your money.

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