The buy-and-hold strategy of stock investing has long been the mantra of sustainable portfolio growth. The basis of the strategy is to buy a good company and hold onto it for years until it turns a profit—because it is a good company and the average stock return historically has been 8-10%. The best investors have long advocated this strategy, from famed value investor Benjamin Graham, to billionaire Warren Buffett, and to pretty much any traditional stock investing book you pick up.
But there is some empirical evidence that the buy and hold strategy is becoming more scarce among investors. Alan Newman’s latest CrossCurrents newsletter states that from 1926 to 1999, the average holding period for a stock is 4 years. Since then, it has been just 3.2 months.
Highly technical traders along with blackbox trading have grown while small retail and individual investors have largely exited the market because of increased volatility and decreased income. And so, the buy and hold strategy that has largely been touted by long-term individual investors have largely given way to short-term trading strategies. But just because buy-and-hold is no longer as abundant in the market, does it mean that it is a dead (and useless) strategy? The answer is no.
Although the average holding period of a stock has largely shrunk, the buy and hold strategy is still a viable strategy for passive investors, as seen from the graph below.
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In this graph, it shows that global market index (which is a benchmark to measure all major class assets) did better than 89% of actively managed funds from December 2001 to December 2011. Yes, if you got an index fund and left it alone for 10 years, you would have done better than 89% of actively managed portfolios. Keep in mind that this is after the big dip in 2009 and the bounce back thereafter. There was a lot of volatility in the market these past 10 years and the buy-and-hold strategy still proved to do better than most actively managed funds. In periods of high volatility, the future becomes more uncertain and thus harder to predict.
So if you are new to stock investing, do not be swayed by the promise of big money through day trading or technical analysis. Buy-and-hold works and will continue to work as long as we aren’t able to predict the future. But that doesn’t mean you can’t employ other methods. You can do your due diligence to find good and undervalued companies, thereby increasing your chances of beating the overall market average. On this blog, I advocate aggressive investing (while young) so I do not like to buy index funds that will match the market’s return. Instead, if I am employing a buy-and-hold strategy, I like to find undervalued stocks that will eventually beat the market.