'Buy & Hold' is Not Dead (If Properly Defined)

"If I can assign names as well as pictures to objects, the right assignment of them we may call truth, and the wrong assignment of them falsehood." ~ Socrates

If one makes the statement, "Buy and hold is dead," what do they really mean by that?  How do they define the term buy and hold? (Of course, to make this argument, one would also need to define the term, "dead," but I won't get that far into semantics here).

If buy and hold is truly "dead," in my humble opinion, the term must be defined as follows: 

An investment strategy of buying shares of a particular investment and holding the investment for a period of time generally accepted to be "long-term," such as 10 years.

Is that a fair definition of "buy and hold?"  Perhaps it is, but who on the planet actually invests like this? 

Who actually bought, for a simple example, shares of an S&P 500 Index Mutual Fund 10 years ago, let it sit there without buying any new shares or any other asset types for diversification, and sold it today?  I'd love to hear of any examples if any really do exist.

For reference, $10,000 invested in the S&P 500 Index for the ten-year period ending March 31, 2009, would be worth $7,742 at the end of the period -- a total return of -22.58 or -2.47 annualized (An index mutual fund would have returns slightly lower than this when expenses are included).

These are quite sobering numbers and would tend to lead a rational person to conclude that so-called "long-term investing" has gone the way of the Dodo bird. 

In summary, if buy and hold, by the previous over-simplified definition, is dead then it never was living in the first place.

So what is my definition of buy and hold?  There are certainly many acceptable definitions, as it should be, but here is a loose framework of what I would accept:

An investment philosophy of selecting investments, usually as part of a diverse portfolio of other investments and asset types, with the intention of holding (and continuing to purchase shares if applicable) of the investment(s) for at least three years.  The investment(s) will be used as a tool, along with the other investments and asset types, to serve a larger purpose for an objective unique to the individual, which would typically have a time horizon of more than five years.

The key phrases in this definition are "continuing to purchase shares" and "unique to the individual."  

On the "continuing to purchase shares" point, is it not reasonable to expect a buy and hold investor to continue purchasing shares throughout the holding period?  Wouldn't a buy and hold investor, also be a typical user of dollar-cost averaging? 

This same buy and hold investor can certainly also be a net buyer when the herd is running from stocks and a net seller when the herd is running toward stocks without abandoning the buy and hold philosophy.  These practices certainly weaken the argument that buy and hold is dead. 

For reference, the S&P 500 may be lower today than it was 10 years ago, but it currently stands more than 8% higher in price than its low in October of 2002, and more than 30% higher in price than its more recent low in March of this year -- both times included in this 10-year period for which our buy and hold investor would have been buying more shares at lower prices.

If our buy and hold investor diversified into other investments and asset types, their investment philosophy, judging by returns in other sectors, certainly would not be dead.  The 10-year annualized returns ending March 31, 2009, weren't too bad for several common sectors and other asset types used for diversification:  Precious Metals (15.77%), Natural Resources (9.21%), Health Care (3.88%), Multi-Sector Bond (5.15%) and Taxable Money Market (3.65%).  

The "unique to the individual" point in my definition, makes the "buy and hold is dead" argument, well, dead! 

Buy and hold is not some static investment strategy that can only be used in one way.  Buy and hold is more philosophy than strategy and says the investor is not an absolute market-timer.  This investor is not chained down under lock and key to the same investment(s) for a 10 or even 5-year period -- the investor is simply incorporating the idea into their investment selection criteria that they would be willing to hold the investment for a long period of time.

"Words are not (except in their own little corner) facts or things: we need therefore to prise them off the world, to hold them apart from and against it, so that we can realize their inadequacies and arbitrariness, and can re-look at the world without blinkers." ~ J.L. Austin 

In summary, buy and hold, properly defined, is not a static, one-size fits all investment strategy -- it is a philosophy -- one that speaks to the virtues that embody successful financial behavior -- simplicity, moderation and patience -- the same virtues that define the one investor that may embody this buy and hold philosophy more than any other investor -- Warren Buffett. 

As far as I am aware, Mr. Buffett had a difficult 2008 but his buy and hold philosophy has worked well for him more than it has not.  And he is certainly not dead...

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Securities data from Morningstar, Inc, as of March 31, 2009

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Comments

[David]

Great post, Kent.

Good to hear your take on this, and I think I would agree with your emphasizing the idea that " buy and hold, properly defined, is not a static, one-size fits all investment strategy -- it is a philosophy".

I have heard a lot (and written a bit) about this theme over the past year. There definitely seems to be some blurring of terms, that's for sure. Just last week I was reading another post along the lines of "value investing is not necessarily the same as 'buy and hold' investing (or vice versa) per se..". Quite often, Buffett and his recent hits in the market creep into the discussion!

One thing I was reminded of while reading this post was a post I did back in Aug. '08 called "Responding to bear market conditions" (you may remember it).

http://financetrends.blogspot.com/2008/08/responding-to-bear-market-conditions.html

I still remember the reactions this piece provoked. One reader at Seeking Alpha (the article appeared there as well) dismissed the piece saying, "this is a long winded way of saying 'buy and hold' and ignore the market dips" even though the article compared and contrasted two very different market approaches, trading and timing vs. asset allocation and long-term investing program.

That's enough for now, maybe I'll chime in again when others have had a say!

[Kent @ The Financial Philosopher]

Thanks, David.

As you might imagine, my philosophical mind and soul often loses patience with generalizations, such as "Financial advisers do more harm than good."

The blogoshphere is certainly an environment where the vast majority of participants, bloggers and readers alike, seek only to confirm their own biases.

For example, if they believe we are headed for financial Armageddon, then the blogger or commenter will find all the evidence they need to support their argument, without honestly considering all the evidence that supports the opposite conclusion.

The biggest problem is that there are millions of people forming their own opinions based upon these one-sided arguments.

The best I can do in my little space of the blogosphere is to present thoughts that are not given enough voice amidst the deafening noise.

Thanks for stopping by David...

Kent