Every few years the buy-and-hold philosophy of stock investing is besieged by analysts and commentators that either are beholden to interested parties (namely, Wall Street brokerage houses that cut their teeth on frequent trading) or are simply naive in the ways of the market.
It's no coincidence that the arguments against it typically fluctuate with the inevitable market cycle.
"Ultimately, buying and holding is unrealistic and utopian and has failed us in the short term because it breeds laziness, inaction and denial," wrote a particularly insolent commentator in April 2009. "The idea you can make a decision on today's information and that that information and judgment will persist for the next 20 years is as arrogant as you can get."
Yet, ask anyone who's familiar with market history and they'll tell you that an individual investor's one, perhaps only, competitive advantage is time -- that is, holding period.
Trying to time the market is a fool's errand. We're biologically wired to fail at it. When stocks are racing higher, greed tells us to buy. After they plummet, fear takes over and causes us to sell. "If that weren't the case, we would have been eaten by saber-toothed tigers a long time ago," says Carl Richards in The Behavior Gap.
In addition, jumping in and out of securities eliminates one of the most powerful forces in all of investing: compounding returns. You can see how this plays out for investors in Wal-Mart (NYSE:WMT) stock over various holding periods.
On the short end of the curve -- that is, between, say, one and 15 years -- the total return predictably fluctuates in and around the 100% mark. Once you get past that, however, the impact of compounding takes over and accelerates one's returns in Wal-Mart to more than 500%, 1,000%, and even 2,500%.
The lesson here is visual, if nothing else. While Wal-Mart was the stock chosen for present purposes, a graph with almost any other major publicly traded company would take on the same shape.
The name of the game is to achieve the returns on the right side of the chart. But to do that, you have to be willing to wait it out. That's the price of wealth. And it's why so few people achieve it.
Fool contributor John Maxfield has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.