The Buy And Hold Myth

The buy-and-hold investment approach is accepted without question by millions of investors who neither demand any proof of its validity nor consider the possibility of something better. Hand in hand with the acceptance of the buy-and-hold philosophy is the dismissal of any kind of "market timing," which usually implies technical analysis. (Never mind that the profitability of the fundamental analysis used to evaluate stocks is more difficult to verify historically than that of many technical trading approaches.) You cannot beat the market, they say. Better to just ride out the storm and accept any market downturns as part of the price of playing the game.

There are a couple ways to look at this. If you are 30 years old and retirement is potentially 30 or more years in the future, and you believe in the buy-and-hold approach, you never need to read a book, magazine article, company financial report, or newspaper (or watch the news) ever again, as far as your investments are concerned. You only need to funnel your money steadily into an equity index fund for the next few decades, and the statistics say you will eventually come out on top. If the market takes a downturn, so what? You will make your money back eventually.

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But what if one of the downturns you have to "ride out" occurs two years before you were ready to retire, wiping out 20, 30, or 40 percent or more of your savings? Or, what if such a downturn occurs when you need money for yourself or your family in an emergency or even for something more mundane like a house or to start your own business.. Will you be willing or able to wait 3, 5, or 10 years to recoup your losses? What if you were simply interested in improving your returns?

For those who consider the buy-and-hold method to be unassailable, consider this: From roughly 1966 to 1982—a period of 16 years—the U.S. stock market essentially remained flat in nominal terms (see Figure 1.1, which shows the Dow Jones Industrial Average from June 1, 1965, through June 1, 1984) and actually lost ground when adjusted for inflation. This would mean a 49-year-old in 1966 looking forward to retirement at age 65, with a substantial amount of his equity in stocks, would actually have been poorer by the time his company gave him his gold watch and good-bye part)-. Upon reflection, one might be tempted to say "buyer beware" regarding long-term stock holdings, but a more accurate admonition might be "holder beware."