Is buy and hold dead and gone?
By Gordon Powers, Sympatico / MSN Finance
Given that we’ve never seen a 10-year stretch as bad as this one, it’s not surprising that so many people feel that that buying and holding stocks is a mug’s game.
Nonsense, counters Matt Hougan, editor of IndexUniverse. If there were ever a time for buy and hold, it’s now. The idea that frequent traders will do better than buy-and-hold investors is just bunk, he maintains.
For every trader who makes a good decision, there’s a counterpart making a poor one – and the odds are that he doesn’t do it for a living. And since there are major costs involved in frequently buying and selling stocks, you’ll actually find yourself in a negative-sum game, Hougan maintains.
Of course, the case for buy and hold isn’t that the market always goes up. It clearly doesn’t. Rather, it’s that holding through seemingly incessant turmoil trumps anyone else’s ability to time the market consistently, successfully and in a practical way.
Critics of buy and hold love to point to the fact that, after peaking in 1929, the stock market didn't regain its old highs for close to 30 years – a lifetime for most people.
But this isn’t 1929, Hougan says. Not even close. We’re 18 months and 45% removed from the July 2007 peak. All of which means, unless the market is really going to zero, we’re a lot closer to a bottom than we are to the top.
Rather than looking at 1929, he believes, it makes more sense to look at 1932 – when the market was down substantially, hovering near its bottom. From there, over the subsequent 30 years, investors enjoyed roughly a 13% compound annual growth rate.