Buy and Hold Myth

Buy And Hold Is Not A One-Size-Fits-All Investment Strategy. It Is A Special Case Investment Strategy That Should Be Used Only When Conditions Are Appropriate.

The appeal of buy and hold investing is simplicity. Buy and hold requires little intelligence, skill or serious effort and completely ignores the essential investment concept of managing risk. Buy and hold’s allure is as old as eternity – get rich with little or no effort. Just mindlessly make your monthly deposits, don’t blink when the market tanks, and eventually you will emerge rich.

The preachers of the buy and hold gospel are supported by several well documented, academic studies showing that a diversified portfolio of stocks never lost money when bought and held for twenty years or more. They also teach the idea that buy and hold stocks outperforms other investments such as bonds, real estate or cash equivalents over the long-term.

“If you want to make money, really big money, do what nobody else is doing. Buy when everyone else is selling and hold until everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investment.”

J. Paul Getty

That much is true.

And if you take what they say at face value the case for buy and hold may seem compelling. Unfortunately, it’s not what they tell you that’s the problem – it’s what they don’t tell you about buy and hold that will cost you money.

Below are some of the inherent flaws in buy and hold logic that will hopefully make you think twice about this sacred cow of investment strategy and investigate deeper with an open mind:

  • Buy and hold makes no sense because it implies the risk of assets is always justified by the reward. The idea that every year is a good year to own stock is patently false. The facts are well researched and proven that the risk of buying and holding securities is not justified by the reward under certain conditions (and these conditions are completely knowable without the benefit of hindsight).
  • Buy and hold implies that prices don’t matter because the strategy requires you to buy and hold at all times regardless of price. Is there any other buying decision in your life where price doesn’t matter? Of course not, so why should investing be any different?
  • Buy and hold uses dynamically composed investment indexes (S&P 500, etc.) to support the case for a static investment strategy (buy and hold). The truth is more stocks have vanished or gone to zero than have survived to this day. That is why the very indexes used to support the research for buy and hold do just the opposite – they sell and replace stocks regularly. Why would you do any different?
  • There exists a mathematically implied optimum holding period for securities based on transaction costs and volatility, so how can a “no transaction” strategy like buy and hold make sense? It implies zero transaction activity is optimal which is mathematically false.
  • Buy and hold is a purely offensive investment strategy that ignores the defensive half of the investing equation – risk management. It implies risk is something to be accepted rather than controlled. How can buy and hold make sense when it is only one-half of a complete investment strategy?
  • Buy and hold is passive. If the passive approach isn’t an effective strategy for advancing your career, developing satisfying relationships, raising productive children, maintaining health or any other important aspect of your life, what makes you think it is an effective approach for investing?

“The wild swings of real markets means you have to build a wider margin of safety than conventional theory holds.”

Benoit Mandelbrot

These are just a few of the logical flaws hiding behind the buy and hold myth. There are many more. The following articles will introduce you to some of the research and statistics on buy and hold that your broker never showed you…

In summary, Financial Mentor does not oppose the buy and hold investment strategy. We just oppose how it is marketed as an all-weather, all-condition investment solution when the research supports it as a special case investment strategy that should only be used when conditions are appropriate. Learn the facts so that you can decide for yourself.

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