When Buy & Hold Works and When It Doesn’t

This post was written by Tony.

Simply put, buy and hold is an investment strategy that is favored by many investors. In case you don’t know what buy and hold is, here is an excerpt of its definition from one of my blog posts.

Buy and hold is a long term stock market investment strategy where one buys into an investment and doesn’t trade around the position, regardless of the market’s fluctuations. Once the investor has a position, he or she is not concerned with short term fluctuations and random price movements. The theory behind a buy and hold investor is that the general market moves in an upward direction, and the buy and hold strategy will enable one to catch the general upwards movement in stocks.

A good investor must realize that there is no single investment strategy that works in all types of market conditions. If you stick to an investment strategy, and use it no matter what the market situation, you’ve just got yourself a fast ticket to the poorhouse. Buy and hold works in certain situations, and doesn’t work in others. So….

Here’s when buy and hold works ….

  • The basic concept behind buy and hold is that markets go up in the long term, which ONLY holds valid in a secular bull market. In case you don’t know what a secular bull market is, it’s a long term (more than a decade, less than two decades) bull market. In a secular bull market, it is beneficial for the average, part time investor to buy and hold. There exists some volatility in a bull market, but since volatility isn’t that high as compared to that of a bear market, buying and holding enables one to catch the full length of the bull market (thus enjoy all the investment returns of the bull market).
  • Buy and hold only works in the stock market, because stocks are in a general uptrend (in the long, long term).
  • Buy and hold only works if you can afford to hold. Applying this investment strategy requires one to hold onto stocks when the going gets tough (stock market crashes, panics, etc). The problem here lies in the fact that 99% of investors are prone to following the market’s mood. So if everyone in the stock markets are feeling fearful, many buy and hold investors will lose the courage to hold, thus sell their investment holdings when they should have held and waited out the crisis. As long as you conquer (stay in control) of your emotions, and avoid the noise around you, holding onto stocks during market crashes shouldn’t be a problem.
  • Buy and hold works if you have a safe job. Part time investors are often forced to liquidate their investments when they get fired from their job (use the money from their investments to put food on the table). As long as you have a secure, steady source of income (or have enough money to live on for the rest of your life), you can afford to hold onto your investments when the markets turn south.

… And here’s when it doesn’t work.

  • Buy and hold doesn’t work in a secular bear market. A secular bear market is the opposite of a secular bull market. Secular bear markets usually last between 8 – 17 years. Two historically recent secular bear markets are in 1969 – 1982, and 2000 – present. If you bought and held during those periods, you would have noticed that your portfolio hadn’t increased in value, while real inflation  was eating away at your hard earned saving’s worth. Buying and holding during a secular bear market just doesn’t work, because one will be holding onto an investment that will generate zero investment returns for years to come (until the secular bear market is over).
  • One should not apply the buy and hold strategy to the commodities markets. Here are two major characteristics for commodities.

1) Commodities, adjusted for inflation, tend to go flat in the long term. Buy and hold assumes that the markets are in a general uptrend, hence, doesn’t work well with markets such as commodities that aren’t following this assumption (don’t go upwards in the long term).

2) The volatility in commodities is utterly insane. Commodities like silver often fluctuate more than 100% in a year. For example, recently there has been a significant price dip in gold IRA’s. This is typical and shouldn’t be of any concern to those who wish to buy gold for investment purposes. However, it does represent a great opportunity to purchase precious metals that most experts are predicting will return to higher prices over the long haul. Remember, buy and hold works best in calm, trending markets where it’s easy to hold, not those like the commodities markets that experience very choppy price fluctuations (volatility makes investors feel nervous, hence it’s hard to hold onto one’s investments).

My Point.

Do not use buy and hold all of the time. When the market conditions are favorable to buy and hold, use it. When they aren’t, don’t use it. Simple as that.

Have you used buy and hold strategies before? What have you learned?


Comments

When Buy & Hold Works and When It Doesn’t — 20 Comments

  1. It’s the rare person who can buy & hold through a crash. When you are in retirement & a secular bear market is upon us, it’s almost impossible to buy & hold stocks. We leave our portfolio to a fund that invests for you according to your age. It’s been fine so far & we don’t worry as much about market fluctuations. Perhaps that’s our version of buy & hold!

    • That’s interesting. I guess it works, but buy and hold is depending on the fact that the American empire will last, and our corporations will still dominate the world. If that fact is destroyed…..

  2. Tony, Even during the last “dead” decade of investing, if you reinvested dividends, you would have earned a slightly better return. Invest internationally and diversify amoung asset classes, and you would have beaten inflation, if only by a small margin.

    • But what happens if you don’t understand international? A lot of investors say “invest in China, because it’s the next big thing. Invest in Brazil or India, etc.” But how can you be a good investor if you don’t understand how it works? The way the markets work in China isn’t something that 99.9% of Americans understand.

  3. While I appreciate the ideas, I guess the question becomes, why is “buy and hold” considered a necessary strategy? We’re assuming that there is some inherent value to buy and hold… when in actual fact, I think it harms more investors than it helps. I’d encourage a more “responsible” approach that teaches people not to tuck their money in an investment and then walk away until their annual check-up. Too much happens… and I’d rather keep my money a little closer than that.

    Thanks for the thoughts to chew on… well presented.

    • You want to know why it’s touted so often? Because it’s what the public wants. The public wants to hear that they can buy today, hold forever, and voila! Their pension funds will be overflowing with money when they retire!

      Wall Street and big media tells people what they want to hear, not what they need to. The truth is always hardest to digest.

    • But according to Sustainble PF, you’re not suppose to sell in 2007, because it “doesn’t involve selling”.

      But yes, in secular bear markets, there have been 4 year bull markets. Ride the trend. And actually, history’s biggest small term profit would have been the NASDAQ in 1995-2000. But I understand what you’re saying.

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