In the aftermath of last year's stock market crash, buy-and-hold investing became a controversial strategy. But one year later, mutual funds pursuing a long-term, low-turnover approach to investing seem to be holding up surprisingly well.
I ran a quick screen for domestic stock mutual funds from familiar fund companies, each with turnover rates of 25% or less. Among the more promising results, I found:
|
Fund |
Turnover |
10-Year Average Annual Return |
Top Holdings |
|---|---|---|---|
|
Mairs & Power Growth (MPGFX) |
2% |
6.5% |
Johnson & Johnson |
|
Wasatch-1st Source Income Equity (FMIEX) |
5% |
7.6% |
Hewlett-Packard |
|
Amana Trust Income (AMANX) |
6% |
6.0% |
Colgate-Palmolive |
|
Neuberger Berman Genesis (NBGNX) |
18% |
11.4% |
Copart |
|
S&P 500 |
(0.2%) |
Data: Morningstar.
Why do such funds keep their turnover low? According to the Mairs & Power fund's prospectus, its managers hold stocks "for relatively long periods of time to allow the power of compounding to build wealth for our shareholders." Also, low turnover signals real commitment to managers' research and decisions. The prospectus does warn that there will be times when turnover rises a bit, and that will likely result in greater capital gains and losses. This can lead to a higher tax bite and greater commission costs -- a definite disadvantage of not following a buy-and-hold strategy.
Of course, the ultimate buy-and-hold mutual fund is the classic index fund, such as those based on the S&P 500. These funds buy the same 500 companies in the index, then hang on for years and years. The only buying and selling decisions they ever need to make are simple ones; when the index drops a company or adds one, they do the same.
You can make big fortunes by hanging on for the long haul. It helps to zero in on great companies when they're on the small side, with abundant room to grow; these are the companies most likely to grow tenfold for you. Whether in your own portfolio or through mutual funds, a low-turnover approach can serve you well.
