The buy-and-hold strategy
Jonathan Chevreau, Financial Post Published: Friday, April 17, 2009
Among the many casualties of the great bear market of 2008-09 may be the buy-and-hold strategy or the Warren Buffett approach of buying good businesses and waiting patiently for the market's perception of their value to catch up.
Indeed, when it seemed the market had hit new lows last November, CNBC aired a feature declaring the
"death of buy-and-hold," with pundits claiming only suckers hung on through thick and thin. And value-oriented fund company AIC Limited, which still uses the slogan
"buy, hold and prosper," has suffered from such derogatory variants as
"buy, hold and perspire" or "buy and fold."
But rumours of the death of buy-and-hold may be premature.
The Investment Reporter, a well-regarded newsletter founded in 1941, recently concluded buy-and-hold portfolios do better over the long and short run, citing an academic study (by Lakonishok, Schleifer and Vishny) that looked at returns of actively managed pension funds over six years. I
t found that, on average, buy-and-hold portfolios beat actively managed portfolios by 0.78% a year, not factoring in taxes, management fees or high cash positions.
A buy-and-hold approach
- minimizes commissions and tax events and, naturally,
- lowers the chances of mistiming the market.
It's compatible with passive indexing strategies, but you don't have to be an indexer to benefit from this approach. It can be used equally with quality dividend-paying stocks, ladders of bonds or GICs.
Dan Richards, president of Strategic Imperatives, says
investors have swung from buy-and-hold to frequent trading but either extreme is a "prescription for disaster." He says academic research from Terrence Odean and Brad Barber shows
frequent trading hurts investment returns. The two American business professors wrote a seminal article in 1999 called Online Investors: Do the slow die first?
Vancouver financial advisor Clay Gillespie believes buy-and-hold works for various forms of managed money, such as mutual funds, wrap accounts and other fee-based investment management solutions, although it may not always work with stocks. "An individual company may go out of business and thus have a return of zero." With a particular stock, it
may be necessary to sell when
- there are changes in one's personal situation, retirement, for example, and
- it's advisable to reduce volatility.
- Portfolio rebalancing may also require some tweaks in the buy-and-hold approach.
But "style drift" usually tends to produce poor performance over time, he says.
Mutual fund companies encourage buy-and-hold, often levying short-term trading penalties on those who trade in and out too often.
Typically, fund unitholders buy high and sell low when they switch too often. "It is this multi-percentage point drag that buy-and-hold investors are trying to avoid," says Norm Rothery, chief investment strategist for Dan Hallett & Associates.
Joe Canavan, chairman of Assante Wealth Management, believes
fund investors can successfully build portfolios that include both fund managers who use a buy-and-hold approach as well as managers who use a frequent-trading approach. The danger is in trying to do only one or the other, then changing your horses midstream.
That is more likely to result in being "whipsawed," Mr. Canavan says, incurring losses with one strategy, then abandoning that for the opposite approach just as the tide was about to turn.
In his Canadian Capitalist blog, Ottawa-based Ram Balakrishnan advises to
"keep faith in buy-and-hold." He reassures readers it's "hard to maintain equanimity in the face of such a steep decline as right now. But what other strategy is there other than buy-and-hold, where almost everyone can have a good shot at reasonable returns? I don't think there is one."
Unlike most advisors, Robert Cable, Toronto-based head of ScotiaMcLeod's Cable Group, is a strong believer in "seasonal" market timing, also called a "sell in May and go away" strategy. While investors may want to emulate Warren Buffett and buy and hold forever, in practice "nobody does it," he says.
He recalls asking 300 advisors at a Florida conference how many of their clients had bought and held the same portfolio a decade or more. The only hand that went up represented a client who was literally in a coma following an accident and whose account could not be traded.
"Anyone who goes into investing with the intent of buying and holding virtually always succumbs to outside pressures to abandon the strategy. My guess is when we have nobody believing in buy-and-hold again, we will again be ready for one big bull market to take off," says Mr. Cable.
Markham-based advisor Robert Smith says
buy-and-hold works, but not in isolation. Investors need
- proper asset allocation geared to their risk tolerance,
- portfolios must be well-diversified and
- investments can't have been purchased at bubble-like prices.
- They also need to buy during the tough times to bring down their average costs, he says.
"If the investor follows all these requirements, buy-and-hold will not fail them," Mr. Smith says.
Read more: http://www.financialpost.com/story.html?id=1507182#ixzz0eYEmvC9K
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Comment: My personal experience of 20 years, buy and hold is safe for selected stocks.
