There's No Such Thing as "Buy and Hold"

Google the phrase "buy and hold is dead," and you get around 200,000 results. That's not as many as I got when I Googled "Weird Al" (13.7 million) or "Google" (1.76 billion), but it nonetheless demonstrates how many pundits, bloggers, and other cyber-scribblers have declared that the market crash of 2008 nailed the final nails in the coffin of buy and hold.

When you look at the preliminary evidence, you can't blame them. Just read the average annual years of these "blue chip" stocks over the past decade ... and weep.

Source: Morningstar.

That's how much they lost each year, on average. Surely, you'd think that such evidence would convince experienced investors, and especially good financial advisors, that buy and hold is dumb and dumber. But you might be surprised, due in no smart part to misunderstandings about what "buy and hold" really means.

We asked the opinions of the fee-only financial planners of the Garrett Planning Network -- who are now offering a limited-time 10% discount to Fool readers (just click on your state on the Locate an Advisor map, and look for the Fool logo for participating advisors) -- for their take. Specifically, we asked: Is buy and hold dead? Here are their responses.

"I am not even sure what people mean by buy and hold anymore. If they mean buy and hold a specific stock without consistently revisiting its story and valuation -- well, that should never have even been a viable notion. If they mean sticking with a specific asset allocation strategy by methodically reviewing and rebalancing even during times of stagnancy or distress ... yes, it's alive and well. I personally love how some illustrations make a big fuss about bonds outperforming stocks in the last 10 years. Seriously ... no rebalancing?"
-- Derek Kennedy, CFP, Knoxville, Tenn.

"Buy and hold without reviewing has never been a good strategy. Carefully determining an asset allocation, selecting investments, performing a disciplined review, and rebalancing are components of sound money management strategies. It amazes me that individuals who maintain their homes impeccably never think to maintain their portfolios."
-- Leisa Brown Aiken, CFP, CPA, Chicago, Ill.

"Buy and hold was never intended to be set in stone. If your asset allocation is appropriate to your goals, investment horizon, and risk tolerance, then changes should be modest and geared to rebalancing. If stocks appear to be overpriced (using broad measures like the Shiller P/E comparisons to historical averages) one can reduce the equity allocation within the target range, but in general, trying to time the swings in the markets is impossible."
-- Lydia Palmin, CFP, Oakland, Calif.

"Buy and hold is not dead. However, choosing well-run companies with low debt loads that pay regular and increasing dividends will go a long way to improving your cash flow to cover living expenses. By structuring a ladder of certificates of deposit and/or bonds or bond funds for expected income payments, one would not have to sell equities in a down market, and dividend and capital gain distributions would add to cash flow."
-- Martha Schilling, AAMS, CRPC, ETSC, CSA, Dresher, Pa.

"If buy and hold were actually dead, all of investing would be dead. Here's why. Let's divide all investors into two teams: those who buy and hold and those who don't. Since the traders are merely trading among themselves, this team continues to hold all of the traded investments they started with. Both teams will participate in the growth of their investments in exactly the same way. Some individual traders will come out ahead of others, but that's only because other traders came out behind. It's the losing traders' money that goes to the winning traders. Collectively, trading cannot beat out buy-and-hold investing. In fact, because additional trading increases investing costs, the traders eventually lose to the buy-and-hold team. So, if buy and hold is dead, the alternative is deader."
-- Dylan Ross, CFP, East Windsor, N.J.

"Buy and hold was never dead -- it was simply over-simplified and taken to an idealistic extreme that it was never meant to serve. If you want to invest in something that can grow in value over time, then it follows that it can also shrink, disappear, and/or get you in legal or personal trouble later on. Whether you are Buying-and-Holding or Selling-and-Re-buying, you and/or your Trusted Advisor should be watching both your account and whatever external factors may significantly affect your account over the life that it is meant to endure. Not an easy task, to be sure, but certainly not one that should ever fall under the banner of 'buy and forget!'"
-- Josh Giminez, EA, ERPA, Columbus, Ohio

"If you define buy and hold as a generally passive asset allocation strategy, some people say it is dead because virtually all asset classes went down in 2008. It is not perfect -- no strategy is -- but it works better than the alternatives, which are all based to some degree on market timing. The presumption that advisors or investors are going to correctly forecast major market moves (successfully staying out of bear markets and fully participating in bull markets) flies in the face of the historical evidence. Both the professionals and the amateurs failed to forecast the most recent crisis, so how can you have any confidence that they will forecast correctly in the future?"
-- Kent M. Grealish, CFP, San Bruno, Calif.

"The benefits of buy and hold [are] that it is tax efficient, cost efficient, and helps decrease behavioral mistakes."
-- Michael Chamberlain, CFP, Santa Cruz, Calif.

"Buy and hold is not dead, it was just never really followed correctly by most people. It never meant don't make any changes to your portfolio or that you could pick your asset allocation, then stick the portfolio in a drawer and forget about it for the next 30 years. You have to trim your winners and buy into the losers with a very logical, pre-set list of parameters. Rebalancing is key, as well as accepting that everyone makes mistakes in their investments, so get over it. Take the emotion out of the investment decisions."
-- Katie Birmingham Weigel, CFP, Boston, Mass.

Buy and hold -- but don't be stupid
The truth is, the term "buy and hold" is a bit misleading; it should be something like "buy and hold until you sell, due to regular rebalancing or a change to your risk profile perhaps because you're nearing an investment goal such as retirement," but that's just too dang long. But whatever you call it, your investment strategy should be built on a consistent process, not willy nilly decisions that usually have more to do with emotions than fact.

If you need a little professional help in developing such a process, visit the Locate an Advisor area of the Garrett Planning Network website. For a limited time, advisors with a Motley Fool logo next to their names are offering a 10% discount to Fool readers.