"BUY AND HOLD IS DEAD"

I recently came across the following statement on a salesman’s website:

Buy and hold is dead. It's over. Game, set, match. Trend followers were the only ones who made money in the greatest market melt down since the Great Depression. Do you know how they did it?

What an extreme statement. How very black and white. What is the author referring to? What instruments is he considering? What time periods? Has he actually back tested a buy and hold approach on any asset class or classes? Has he considered the effect of asset allocation? Has he looked at re-balancing? Has he actually compared buy and hold to a trend following approach (on stock markets for instance) over varying time periods? Or is he simply sensationalizing the recent market crash?

Let’s concentrate for the time being on un-geared stock investments in exchange traded index tracking funds. For the standard private investor in stock markets, these instruments have to be the investment of choice. They avoid stock specific risk and they are self adjusting – as stocks drop out of the relevant index through poor performance they are replaced by better performing stocks. The question is then whether to adopt a buy and hold approach or whether to apply some sort of timing system.

To get a more balanced view, one of the soundest series of articles on trend following and its comparison to buy and hold for stock investments can be found here:

http://www.fundadvice.com/articles/market-timing.html

My own research indicates that timing models and buy and hold show very similar absolute performance on stock market investments over the time. In terms of CAGR. The benefit of a timing model is lower volatility and a reduction of drawdown. Timing models will have you out of the market during a downturn but will have you back in somewhat late when markets turn back up again. Risk adjusted returns can be higher on timing models but absolute returns will be very similar. Buy and Hold will soar higher and dip lower but over time performance is likely to equate with that of a timing model.

Yes, you can devise a market timing or trend following system to potentially outperform buy and hold in absolute terms as well as risk adjusted terms. Concentrating your fire power in markets showing buy signals is one way (rather than splitting your position size into equal proportions matching the overall number of instruments in your total potential portfolio).

But the simple assertion that “Buy and Hold is dead” is misleading at best. Especially when you take into account the adverse tax consequences of a timing method which is always in and out of the market. As opposed to a buy and hold approach which has no tax consequences for anything other than the dividend stream while the investment is held.

As ever, the moral to be learnt is to do your own research and not to take too much notice of the assertions of others. Myself included. It is true that a timing model can make for a far smoother ride – the same gain for less pain. But it is not the only approach and it is certainly not the only correct approach. The commentator who made the statement set out above may not have thought this complex matter through with the thoroughness it deserves.

From my own research, I do not believe that this is the full or complete story.

 

Buy and hold is effective, but only in a bull market. Once strong evidence suggests that we are or will be in a bear market, the buy and hold strategy MUST be shelved.

 

But you can also BUY and HOLD a short fund or a put until the end of the bear leg.

 

That sales letter contains some bull. Buy and hold is the only approach that the little man with little knowledge has to minimize risk of loss, to let time save him.

Only a minority of traders take the cash, the rest pay the winners and the brokers.

 

Buy and hold works better when you are buying into a severe market rout, like last year.

 

"Buy and Hold" by its vey definition is buying and then HOLDING. It does not consist of buying short funds or puts in a downturn nor buying into a market rout.

These guys provide a pretty good example of pure Buy and Hold: http://www.ifa.com/

Combined with intelligent and dynamic asset allocation, buy and hold need not be such a bad strategy. There have been long periods when the equity markets have gone nowhere but a market timing strategy is unlikley to have made an investor money during such periods either. Note that I am talking of investment here not shorter term trading.

The salesman's quote above is presumably designed to aid in the sale of his trend following products. A car salesman selling Fords in understandably unlikely to give due credit to Volkswagen products. Which is why statements like the one I quote above need to be put into context. I am a believer in market timing but I do not like extreme statements, unsupported by evidence and back tested results, which give a biased view.

 

Similar to going into a cash position to offset unrealized losses in the long fund, except you get to pay fees to the short fund, reducing total return.

 

I think a dollar-cost averaging approach to investing long term in single stocks might be effective even in times like these, but only with strong companies with decent volatility, such as AAPL.

 

Buy and hold can be smart IF you pay attention and have an exit strategy for your positions. The problem is that most investors are lazy and/or ignorant and employ a "buy and forget" method instead. They were then surprised when their mutual funds lost 40% last year. You cannot hand over responsibility of your financial future to someone else.
Smart investors are now adding automated trading to their toolbox.

http://www.cool-trade.com/education/How_to_invest_for_2009.asp?server=195

 

Yea great. A bot does the churning. All the broker does is sit back and relax. That's great for the broker.