Buy and Hold Is Dead. Long Live Buy and Hold!

The rise of equity ownership in the United States, fed by the Internet, low-cost discount brokerages, and self-directed retirement vehicles like 401(k)s and IRAs, has brought along with it heightened expectations.

When SPDRs (NYSE: SPY  ) investors, hoping only to track the movement of the S&P 500 stock index, are losing money, as they have over the trailing 10 years (a far cry from earning the ballyhooed 10% average annual return), the wisdom is rightfully challenged.

Blue Chip

10-Year Return

Microsoft (Nasdaq: MSFT  )

(42%)

General Electric (NYSE: GE  )

(60%)

Coca-Cola (NYSE: KO  )

(25%)

Disney (NYSE: DIS  )

(13%)

Dow Chemical (NYSE: DOW  )

(57%)

Data from Capital IQ, a division of Standard & Poor's.

As the table above demonstrates, even stalwarts have taken a bath over the past decade.

Granted, June 1999 was a frothy time for the market, but critics of the long-term buy and hold philosophy can point to three-month returns that blister 10-year returns:

Blue Chip

3-Month Return

Microsoft

33%

General Electric

59%

Coca-Cola

23%

Disney

52%

Dow Chemical

171%

Data from Capital IQ, a division of Standard & Poor's.

Many people are pointing to the recent volatility in the market and dismal 10-year returns and arguing that investing paradigms have shifted.   

For the next few weeks, investment experts and Fool advisors, analysts, and editors will be weighing in with their thoughts on the future of "buy and hold." But we also really want to hear from you. Answer the poll below, and let us know the reasons for your answer in the comments section at the bottom of this article!

Microsoft, Coca-Cola, and Disney are Motley Fool Inside Value recommendations. Disney is also a Stock Advisor selection. Coca-Cola is a Motley Fool Income Investor recommendation. The Fool has a full disclosure policy.


Read/Post Comments (30) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 12, 2009, at 4:34 PM, USNCPOFOOL wrote:

    GE is the oldest stock in the DOW. Not only Buy+Hold-BUT continue to BUY at the price now! The company is solid-USA Is solid and anyone who disagrees should move to China! Ge will be $30 by September!

  • Report this Comment On June 12, 2009, at 6:41 PM, TMFSelzhanik wrote:

    The key to long-term buy and hold investing, or any investing for that matter, is to start with buying good companies at good prices. Both components are equally important.

    When you buy a stock, you are buying a portion of a company. Know what you're buying. Know what a reasonable price is. You wouldn't go to the supermarket and buy a 100-gallon jug of spoiled milk for $5000, just because it was was big and high priced, would you? But you **would** buy a 1 gallon jug of high-quality fresh milk for $0.99, if the store was willing to sell it for that. Apply that same common sense to investing. And when you buy a company that truly is good, it will probably stay good (unlike that milk) for quite a long time, and then suddenly (gasp!), you've become a long term buy and hold investor.

    Finding a *good* company involves much more than just finding a *big* company. In fact, I tend to see a lot of inefficiencies and waste in large companies that I simply don't see that often in the small ones. Why do I keep hearing TMF calling AIG, Citibank, and the big companies listed here, "stalwarts"? Is it the buzz-word around the office? I do not think that word means what you think it means. "Outstanding strength and vigor." Not, "Large and lumbering." Look it up.

    And then there's the "good prices" part. To become a part of the S&P 500, a company's market cap (total number of shares multiplied by market price) must be high! The S&P 500 is by definition the 500 highest priced publically traded companies in the U.S. And once a company goes down in price so that it falls out of the S&P 500, it is traded for a company that has already gained in price. It's buy high, sell low. Not exactly the best of investment decisions. And definitely not the model of smart buy and hold investing, especially if you're trying to cite an example to discredit the philosophy.

    I think some simple analysis of Microsoft and GE back in 1999 would have made it clear the price wasn't right for buying. Coke and Disney, I might disagree, as a lot of companies were trading at high prices back then. (Dow Chem, I have no idea, out of my sphere.)

    Which brings me to my last point. This article is looking at a 10-year return. The whole point of looking out over 10 years is to smooth out the peaks and valleys, not to exagerate them. Yet this particular 10-year period you've chosen starts in 1999 -- a peak -- and ends in 2009 -- a valley (hopefully, at least). So instead of smoothing, it's exagerating.

  • Report this Comment On June 12, 2009, at 7:38 PM, sid2286 wrote:

    I completely agree with TMFSelzhanik. You take the average increases over ten years to get an idea of trends. But, one of the first lessons of statistics is to throw out outliers.

    Also, the people declaring that buy and hold is dead are hypocrites. They make their assumption based on the fact that during the past ten years the market has changed. But the people who are declaring this time tested strategy dead aren't realizing that conditions can change back. Like if the Capital Gains tax was raised or brokerage fees for that matter. Then it isn't as profitable to trade based on the day to day changes of the market. This would lead people back to the buy and hold method of investing because tax attrition would eat all of the constant traders profits.

    Besides i thought that the last time we declared Buy and Hold to be down and out we ended up with alot of jokes about day traders going bust.

  • Report this Comment On June 12, 2009, at 8:29 PM, klobucar wrote:

    Buy and hold needs to be bolstered with trading options and using the options as an insurance on your hold positions.

    Using options in conjunction with your base positions you can take advantage of the daily/regularly occuring opportunities that presents it self to the attentive investor/trader.

    Investing in our knowledge and practicing that acquired knowledge on a continual basis is the one way we stand a good chance of steadily increasing our positions more often that not.

  • Report this Comment On June 12, 2009, at 9:13 PM, xysmith wrote:

    "The S&P 500 is by definition the 500 highest priced publically traded companies in the U.S."

    That is just wrong. Berkshire Hathaway (mktcap: $141B today) isn't on the S&P 500, while Xilinx, Inc (mktcap: $5B today) is.

  • Report this Comment On June 12, 2009, at 9:34 PM, MartinLois wrote:

    "hoping only to track the movement of the S&P 500 stock index, are losing money"

    I think is wrong to say so, you can profit from stocks market anywhere anytime, here's ten stocks America's leading advisors recommended: http://top5stocks.blogspot.com/2009/06/top-stocks-to-buy.htm...

  • Report this Comment On June 12, 2009, at 10:08 PM, stylecounciler wrote:

    What's amusing about this whole pounded upon subject that buy and hold is dead is the fact there are actually three fazes to this phrase.

    It's not buy and hold,

    it's buy, hold, and sell!

    All in varying degrees of time frames.

    Nothing new here. Same as it ever was.

  • Report this Comment On June 13, 2009, at 4:22 AM, MoFormMelb wrote:

    What most people forget is that the rewards from stock market (or any other form of) investing come from having the intelligence to know where to invest your money. I made a lot of money in the USA stock market in the eighties, & some in the nineties. I got out some years ago when I saw that the data needed for intelligent long term investment was not available to me, as an amateur investor.

    Provided you stick to investing where you have good data available, and provided that you know more or less what you are doing, investing over a ten year time frame gives good returns.

    If you think that you can buy anything because stocks as a whole always go up, you are a fool. Many years ago, the actuary to my (very large) corporate employer told me that long term real returns from the stock market were about 3% per annum in practice. Nothing I have seen in the past fifty years has convinced me that you can get good returns without doing the basic research.

  • Report this Comment On June 13, 2009, at 7:31 AM, pianofritz50 wrote:

    Buy & Hold is a decent strategy for people who do not care about watching the market & the world events. Saving money (aka setting it aside for a rainy day) is always a good thing.

    Diversification is the next addition to securing one's future. Various mutual funds & (now) ETF's can help.

    However, a 200 day moving average strategy, reviewed weekly (let's say on Saturday morning) has kept me out of the real crashes of 2001 and 2008... and I'm retired at 58 because I not only saved & diversified thru out my 35 years of working, but also because I "protected my accumulated wealth (savings)" with reasonably few in/outs of the market using this "plan".

    Review "Fool's" Retirement June 09 newsletter for more info & comparisons.

  • Report this Comment On June 13, 2009, at 9:47 AM, jc09058 wrote:

    A lot of interesting comments on this subject. A number of them I agree with and others I don't.

    I am amused by the statement that "Buy and Hold is Dead" because I've heard this so many times over the years.

    Too many times, I've heard it from brokers, day traders and trading houses as a mantra to convince account holders to buy and sell at a greater rate, and to increase their paycheck/bottom line.

    While I have no problem with anyone making money in their chosen field, I don't feel that I should have to pay anymore than I should because someone would like me to churn my account.

    My option is that a balance of "Buy and Hold', some speculation, diversification, due diligence in evaluating companies, periodic re-evaluation of all purchases, and staying current on company and general news gives very good results for any serious long term "Buy and Hold" investor.

  • Report this Comment On June 13, 2009, at 3:10 PM, ithanley wrote:

    In a year, Buy and Hold may be a less productive strategy but now with the depression on top quality stocks, a buy and hold for a couple of years should be a good plan.

  • Report this Comment On June 13, 2009, at 4:54 PM, dibo528 wrote:

    Buy and hold doesn't work well in bear markets, but buy and hold works superbly in bull markets. Right now I think we are in a bull market. I believe the market will continue to make gains, although, at this point, it will be a very slow, gradual ascent.

  • Report this Comment On June 13, 2009, at 5:13 PM, MAURY56 wrote:

    Second the recommendation of jc09058 above

  • Report this Comment On June 13, 2009, at 6:08 PM, tjargiro wrote:

    I picked the "It's complicated" option, but only because Yes and No aren't specific enough. I make buy and hold work for me because I've learned the difference between THE long term and MY long term.

  • Report this Comment On June 14, 2009, at 9:15 AM, Natador54 wrote:

    Investors should be wary of "buy and hold" until congress establishes sensible regulation of the financial system to prevent the abuses that led to the recent crisis. Until that time I advocate a 'take the money and run' approach, which seems to have been the method employed with great success by Wall Street derivatives gurus and bankers in the recent past.

  • Report this Comment On June 14, 2009, at 11:46 AM, Ulenspiegel101 wrote:

    It isn't as complicated (even though I ticked it):

    If you can buy and hold for 12+ years, buy and hold is fine, certainly if you count dividends and re-invest.

    If you don't have that time to sit back, and you want to take account of the volatility built into current times AND the added distortions from trading programmes, you need to tread carefully.

    GLTA

  • Report this Comment On June 14, 2009, at 4:55 PM, KaiUli wrote:

    Your "stalwarts have taken a bath" chart is incorrect because dividends were not taken into account. Take KO for example: In the last 10 years it has paid 10.28 in dividends. If you didn't reinvest those dividends the "bath" is (8.1%), reinvesting those dividends warms the bath water a bit to (6.5%).

    If you're not going to account for your dividends, then send them to me please!

  • Report this Comment On June 15, 2009, at 1:13 AM, joandrose wrote:

    Presumably nobody just buys and holds ! someday you also sell - otherwise what's the point of buying in the first place . That being so - the debate surely is - at what point or under what conditions, do you make the decision to sell !

  • Report this Comment On June 15, 2009, at 10:28 AM, wkeith1986 wrote:

    The key to investing, as we have learned over the last three bubbles, is threefold: investments must be watched and evaluated on a constant basis, investments should not be made in securities which you do not understand, investments should not be made in companies which you do not understand.

    Buy and hold is a great strategy, but it's not that simple. Situations are always changing, compaines reorganizing, and markets reacting. As another article points out, you must set price targets and reevaulue your position as these are achived. If you don't have time to this, that is what a professional money manager is for.

    If you don't understand exactly what a CDO is, a CDO Sqared, swaption, option, stock, bond, private equity, etc is then you have no business buying it. You would never buy a car that was too complicated for you to drive, why are investments any different?

    As with above, you might understand the instrument you are buying, but not the business you are buying. I have no idea how nueroscience works, and I therefore have no business buying a company which participates in this field. If you understand the business you are much more likely to see the ineffeciency in the market price.

    Buying stocks is not an easy thing, but the rules behind it are simple. We forget these in the euphoria of a bubble, and are brought back to earth as it pops. Buy and hold is not dead, but it was never alive in the way which we manifested it.

  • Report this Comment On June 15, 2009, at 11:50 AM, TimothyVR wrote:

    What about dividends?

    I thought was one of the main objectives of the buy and hold strategy. The accumulation of dividends is not even addressed in the article.

    But hey - what do I know....I'm new to this game.

    One thing I do know, though - there is a veritable flood of articles with virtually the same title right now. How about creating a section where they can be corralled in one place?

  • Report this Comment On June 15, 2009, at 12:01 PM, ajk241 wrote:

    Buy and Hold isn't dead, it just isn't being done properly. Buy and Hold doesn't mean buy one huge lump sum of shares and hope for the best. It means buy a good company at a good price and add to your position at regular intervals over the long haul. And don't forget to reinvest dividends! This dollar cost averaging style of buy and hold is still the best way to invest in the long run.

  • Report this Comment On June 15, 2009, at 12:06 PM, ScottieWP09 wrote:

    Ok, I watched the first 5 minutes of the "Emergency Market Seminar" and then realized this was just an advertisement for Motley Fool Pro. I will stick with my "buy and hold" strategy using low-cost index funds and guarantee over a long term period that they will outperform the vast majority of actively managed portfolios.

  • Report this Comment On June 15, 2009, at 12:12 PM, TMFKris wrote:

    TimothyVR: see this link for the corralling of related articles, under headline "So Is Buy and Hold Dead or What?" http://www.fool.com/investing/general/2009/06/11/so-is-buy-a...

  • Report this Comment On June 15, 2009, at 1:02 PM, Darwood11 wrote:

    Sometimes, when I listen to the arguments about "Buy and Hold" as a strategy, it seems that the discussion is about a "Buy, Hold and Forget" strategy.

    I've changed my approach over the years and I don't think I can put my financial well being on autopilot and expect things to turn out. I gradually changed my personal strategy in the period 2001 to 2007. Up until that time I was largely a "Buy and Forget" investor.

    Today I am a "Buy and Manage" investor. I have about 30% of my investments in a basket of quality stocks. The rest is invested in what most people would call a "moderate" allocation in a combination of actively managed and passive mutual funds.

    I hope to hold my investments indfinitely, But if I can't or is I am not comfortable, then I won't and I don't.

    Initially it was very, very difficult to adjust. Today, I focus more on my targets and when I fail to achieve them, I reconsider, and drop the companies or funds which simply no longer measure up.

    Long live "Buy and Manage"!

  • Report this Comment On June 15, 2009, at 1:47 PM, rbashmore wrote:

    As long as lawlessness in our government allows securities fraud and executive shenanigans to continue without any serious repercussions, buy and hold will be very risky. Who really did prison time so far... Martha Stewart.

  • Report this Comment On June 15, 2009, at 2:26 PM, wolfman225 wrote:

    Even though I am new to investing and Fooldom, I chose "complicated" for the following reason(s): I believe we are seeing an unprecedented (in the US) restructuring of the national economy, with the Obama administration aggressively moving to a central planning (as opposed to market based) model. We've seen throughout history that model fail wherever and whenever it's been tried. With all his various "csars" that have been appointed (not elected)by, and answerable only to, the president, Obama has set up the potential for defacto rule from the top; by usurping the powers and perogratives of the Congress, regular market forces of buy/sell are in the process of being affected/controlled to a frightening degree.

    IMHO, if this is not changed--and changed soon--we investors are likely to find that the stock market is no longer the best, greatest hope for the individual to achieve financial freedom and security. After all, with the compensation csar regulating executive pay, with the treasury secretary regulating compensation in the financial sectors, with talk of controlling compensation even among companies that haven't taken any "bailout" money, with government control of huge sectors of the economy (ie, auto, financial, health care, etc), what's that likely to do to the performance of the market? What's to induce people to invest in a company when it approaches the governmentally-approved maximum allowable profits? Remember all the angst over so-called "windfall profits" last year? Remember the congresswoman threatening the oil executives with government taking over/running their businesses?

    Whenever a government begins controlling the market in order to (in the name of "fairness") chose winners and losers, we ALL lose.

  • Report this Comment On June 15, 2009, at 3:29 PM, lodbjj wrote:

    I think the days of buying a stock and letting it sit without watching it are dead. Does that mean that we all have to become day traders? No, but you should be checking your stock on at least a quarterly bases and have a plan on when to sell. It has never made sense to me to see a stock go up 100% or more and not take steps to protect that profit or ride a stock back down to what I paid for it or to a loss.

    In today's market one should look to protecting his or her capital first. We still have a ways to go before this thing turns around.

  • Report this Comment On June 16, 2009, at 1:56 AM, miteycasey wrote:

    I'm sure I could pick a time period where baseball cards out performed all other invests.

  • Report this Comment On June 16, 2009, at 3:20 AM, joandrose wrote:

    You got it right darwood 11 - " buy and manage " is the only intelligent way to approach an investment portfolio. A nucleus of good low risk dividend paying stocks for the long haul. Compliment this with an actively managed portfolio which varies in percentage of the total depending on risk tolerance. As one ages so the degree of risk tolerance decreases.

  • Report this Comment On June 24, 2009, at 3:09 AM, prose976 wrote:

    Many proclaim that Long Term Investing is dead. I believe it is alive and well, and each of us would be smart to consider our position on the matter. Fact is, Short term is good for building cash to buy long term. But you have to trade daily, grabbing 2-5% here and there, pumping up your bottom line until you have enough to lay a foundation and then build on it. Unfortunately, most of us don't have enough to effectively make a fortune from the amounts we invest.

    I have heard some (what I consider) bad advice regarding regular "payroll" type investing. The theory is that a person can invest a certain amount from each paycheck and become a multi-millionaire over a 40 year period. Possibly...but I have a much better twist on that methodology which mimmicks cost averaging.

    You see, I believe that most "payroll" investors just throw money into whatever stocks are in their portfolios when the paycheck comes in. This is one of the laziest and least effective methods for investing there is. With a little due diligence, payroll investors can not only manage their own stock purchases, but save alot of money doing so, and make much more effective buying decisions. Instead of just throwing that money into whatever stock is already in your portfolio, consider these options each time payroll comes in:

    1. Sell stocks in your portfolio that have ballooned out of reasonable valuation (take some money off the table to reinvest)

    2. Buy more shares of great companies that you already own that have performed poorly.

    3. Look for great companies that are not currently in your portfolio, that have been beaten down for unknown reasons and buy them.

    So you can see how Long Term investing still works. If the fundamentals are still in place and the company is great, buy more of it when it's on a dip, indefinitely. Like any other company, a truly great company will have plenty of ups and it will have plenty of downs during which another position can be bought. Using these three options, over the Long Term, you will outpace any other method of investing. And you will definitely beat the "old" Long Term.

    Don't believe the blowhards who are insisting that Long Term investing is dead. It is not in their best interest for you to use the tools at your fingertips to do well in the market. They need you to buy high and sell low to make their profits. Always sell high and buy low, be fearful when others are not and be bold when others are fearful. Keep your wits, logic and brains about you, and you'll do much better for yourself than any broker will do for you.

    Happy Investing!

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