by Sy Harding 

Buy & Hold. The Hype - The Reality! A column from December, 1999 - Just as true today.

Those who advocate a buy and hold strategy for investors play a dirty trick on them.

Not only is the theory itself, based on the fact that 'the market' always comes back, deceptive, it's entirely bogus.

In addition, just as in exercise programs, diets, or any human endeavor that requires unusual discipline, it's not helpful to advocate a program that sounds great in theory, and has even worked for specific unusual individuals, but cannot be carried to a successful conclusion by anyone else.

The sales pitch for buy and hold sounds infallible. Its first premise is "The market always comes back."

The problem is that the make-up of the Dow and S&P 500 are changed so regularly to make sure they always represent the changing economy, that the statement "the market" always comes back does not come close to meaning an investor's stocks will come back.

For instance, in the bull market of the 1980's leading up to the 1987 crash, investors were heavily invested in that era's favorite stocks, the likes of Polaroid, Chriscraft, Brunswick, Commodore Computers, Wang Laboratories, Itek, Sears, Western Union, Woolworth, etc. All were in the Dow, or S&P 500, or both.

The S&P 500 sure came back from the 1987 crash, but it came back after replacing many of those former winners with the new stocks for the next bull market, WalMart, Microsoft, ToysRUs, Home Depot, Dell Computer, Intel, etc., most of which didn't even exist in the bull market of the 1980s.

As an indication of the degree to which the changes are made, in 1999, fully 43% of the stocks that comprised the Dow just 10 years previous, are no longer in the Dow. Some are no longer even in business.

The changes are made even faster in the more speculative indexes like the Nasdaq and Nasdaq 100.

But even companies that do continue to thrive in the next recovery do not usually see their stocks return to their previous levels. In the next market recovery companies in new technologies usually take over. [2012 update note: That can be seen in the most recent period where high-flying stocks in the 1999 bubble like WalMart, Microsoft, Dell, and the so-called safe and defensive stocks like General Electric, are still 25% to 70% beneath their 1999 levels in spite of the two bull markets since].

The second problem with the buy and hold theory is how long it sometimes takes for even the 'improved' market indexes to come back.

After the 1929 crash it took 26 years, until 1955, for the Dow to come back. No one has that much patience. A 45 year old investor in 1929 was a 71 year old retiree in 1955, when he would finally have seen his portfolio just back to even. Even that ignores the fact that his portfolio would have had to undergo the same kind of continuous changes in holdings that the indexes did in order to have them come back. And of course changing 43% of holdings every ten years is not buy and hold investing. Actual buy and hold investors would have been holding big 1929 stocks like U.S. Leather, or American Cotton Oil Corp, or Marconi, or Baldwin Locomotive, stocks that never came back.

 Just eleven years after "the market" supposedly finally came back to its 1929 peak, in 1955, the Dow hit 1000 for the first time ever (in 1966), and an investor who bought near that level then spent the next 16 years waiting for the market to come back again. The Dow finally came back to 1000 and moved above it for the first time, in 1982.

So, of the 53 years between 1929 and 1982, there was a total of 26 + 16, or 42 years when buy and hold investors would have waited for the market to come back. 2012 update note: After the 2000 peak buy and hold investors (if there really were such persons) were still waiting in 2012, 12 years later, for the market to come back.

The third problem is that a buy and hold investor, by definition, is guaranteed to have to endure every correction, crash, and bear market that the market experiences. Over the last 100 years there have been 22 bear markets, one on average of every 4 years, and their average declines were 36% (if one were invested only in the stodgy stocks of the Dow).

Keep in mind that when a portfolio is down 36% it takes a 56% gain just to get it back to even, which could add several more years of anguish.

That kind of repeated abuse doesn't take long to disabuse one of the notion that buy and hold investing is a viable strategy. Unfortunately that realization always takes place at a market low after a bear market has devastated one's portfolio

'New era' 1990s investors, [remember this was written in 1999], a most determined bunch of buy and hold investors to hear them describe themselves, have already proven they will fare no better than those who went before.

For instance, take those 1990s investors who were buy and hold investors in the Japanese market in 1989. When the powerful Japanese market, supposedly destined to continue upward for many more years, suddenly reversed to the downside and lost 65% of its value from 1989 to 1992, we can know from the way that U.S. dollars were repatriated to the U.S., that those buy and hold investors did not hold waiting for the Japanese market to come back. And if they had, they would still be waiting, as in spite of numerous rally attempts since, in 1999, ten years later, the Japanese market remains 55% below its 1989 level.

U.S. investors in Asian markets reacted in the same manner after those markets crashed in 1997 and 1998. We can measure the bailout after the crashes by looking at the huge outflow of money from U.S. mutual funds that were invested in Asian markets.

We saw the same bail-out reaction by U.S. investors who were invested for the long haul in mutual funds that specialize in small and medium cap stocks, and managed mutual funds. When such funds just faltered fractionally, failing to match the S&P 500, investors bailed out of them by the millions, putting their money in S&P 500 Index funds.

If history has taught anything clearly it is that every bull market convinces investors they should and will be buy and hold investors. But no such creature as a buy and hold investor ever emerges from the other side of a bear market.

If investors will only think about that, look into whatever areas they need for confirmation, look at their own history when their stocks fall out of favor, and realize they don't stand a prayer of having buy and hold work for them, they will have taken a giant step toward long term accumulation of wealth.

Buy and hold does not work, and cannot work.

Investors need to adopt a different strategy, of market timing, or risk management, or asset allocation, or a combination of the three before it's too late.  


Sy Harding is president of Asset Management Research Corp, and editor of, and the free market blog,

These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.

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