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Buy and Hold Advice: Nothing But Sham and Deceit

  • Written by Syndicated Publisher No Comments Comments
    August 28, 2013

    Every time the market returns to a previous peak Wall Street comes out with the observation that ‘the market always comes back. Buy and hold is the only way to go’.

    Just in time to convince retail investors who bailed out at previous bear market lows with huge losses, that this time they should just hold through whatever comes along. Not that they should adopt a strategy that will likely get them out near tops with their profits intact, but a strategy that guarantees they will be fully invested through every serious correction or bear market.

    The importance to corporations, mutual funds and brokerage firms of having investors adhere to a buy and hold investing strategy is clear. What would they do for fee and commission income if sizable numbers of investors bailed out of their stocks and mutual funds for months at a time? And when the investors came back would they return to the same stocks and funds, or move to a competitor’s products?

    Buy and hold’s appeal to investors is equally obvious. It is the essence of simplicity, and requires little knowledge, skill, or effort – until the periodic large losses of bear markets hit.

    Here are just three of many reasons buy and hold is a sham that investors need to recognize before it causes them serious problems again

    1. The advice: Just buy good stocks and hold them.

    What is a good stock that can be held for the long-term? Here are some recommended in 2000 as solid safe defensive stocks. You remember why. Even in a downturn people would still have to eat and drink, still have to take their medicines, will more than ever need the discount and do-it-yourself outlets like WalMart and Home Depot, and credit card providers like CitiGroup”.

    Whoops, they plunged an average of 58% in the 2000-2002 bear market, more than the Dow and S&P 500. They lost big again in the 2007-2009 bear market, and even after the current bull market has returned to its previous peak and gone on to new highs, 13 years since 2000, and they’re still down an average of 17%.

    2. The claim: The market always comes back.

    The market indexes always come back. But will a buy and hold investors portfolio come back”? Obviously not if they held even major conservative stocks like those shown in the above table.

    Another example, in April, when ‘the market’ had finally come back to its previous highs, of the 30 stocks in the Dow more than 30% (11) were still down hugely, an average of 61.2%, from their levels in 2000. They include some of the most famous of the previously highly touted conservative ‘defensive’ companies: Alcoa, Bank of America, Cisco Systems, Dupont, General Electric, Hewlett-Packard, Intel, JP Morgan Chase, Merck, Microsoft, and AT&T.

    How can it be then that the ‘market’, including the Dow, has come back to previous peaks?

    Because so many changes are made in the stocks that make up the indexes, replacing weak stocks with stronger ones. It’s not fraud. The indexes are designed to represent the economy as closely as possible. So they must be constantly revised to contain the companies that best represent the changing economy.

    So for example, 23% of the stocks that were in the Dow in 1999 were no longer in the index by 2004, just 5 years later.  They had been replaced a few at a time by stocks of newer, stronger companies that were more representative of the changing economy. Chevron, Goodyear Tire, Union Carbide and Sears Roebuck were replaced by Microsoft, Intel, SBC Communications and Home Depot. AT&T was replaced by Verizon. Eastman Kodak was replaced by Pfizer. International Paper was replaced by AIG Group.

    In just 11 years from 1988 to 1999 there were 256 changes made in the stocks that comprise the S&P 500, an index of only 500 stocks. More recently in the 3 years from 2010 through 2012 there were 47 more changes made in the stocks that comprise the S&P 500.

    In just the seven years from 1999 to 2006 there were 109 changes in the stocks that comprise the Nasdaq 100, an index that only contains 100 stocks.

    So what does it really mean to investors that the ‘market’ always comes back if the make-up of the indexes by which the market is measured is changed so that it’s not the same market that went away?

    3. The advice: Have a long-term outlook (the market always comes back).

    Even if the indexes that come back held the same stocks investors were holding at the previous top, how long would investors have to wait for their stocks and portfolios to come back?

    After the stock market top in 1929 it was 26 years before the market finally returned to its level of 1929. A 40-year old investor in 1929 was 66 years old, and probably retired by 1955, when he finally saw the market back to its level of 1929. Some investors would have died while waiting.

    Just 11 years later, in 1966, the DJIA reached another new high. It touched the level of 1,000 for the first time ever. It then plunged 35%, and it was 16 years later, 1981, before the DJIA finally reached 1,000 again and began to exceed that level.

    Between the two periods that was a total of 42 years out of 70 that buy and hold investors would have been waiting for the market to ‘come back’.

    Was that a phenomenon of the old days that won’t be seen again? No.

    Current investors who bought and held in 1999 and 2000 experienced what came to be known as ‘the lost decade’. The S&P 500 lost 50% of its value in the 2000-2002 bear market, recovered in the 2003-2007 bull market, only to lose it all again (and more) in the 2008-2009 bear market.


    It was another 13 years of waiting before the Dow and S&P 500 finally returned to its level of 2000 this year.

    There are strategies that avoid the problem.

    Our Seasonal Timing Strategy is up 213% over the last 14 years compared to the S&P 500 being up 49.2%. Its worst year was a 4.2% loss in 2009. 

    To read my weekend newspaper column click here:   U.S. Treasury Bonds Are Oversold

    Subscribers to Street Smart Report: In addition to the charts and recommendations in your ‘premium content’ area of this blog, the in-depth  Mid-week Markets Update will be in your secure area of Street Smart Report.com tomorrow.

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.